Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

 

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong—George Soros 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

The ABS headline bannered, “PSEI back to 6,800 as investors cheer BSP rate cut.”

Figure 1

Well, the entire Asian equity market seems to have celebrated the rising expectations of rate cuts by the US Federal Reserve. In particular, 15 of the 19 national bourses closed 1.96% higher over the week. (Figure 1, upper chart)

The wonders of financial easing have also been manifested in strong rallies in the region’s bonds (falling yields) and firming currencies. The Thai baht, Indonesian rupiah and the South Korean won were this week’s strongest Asian FX. (Figure 1, lower image) 

Essentially, bad economic news is good news for the Overton Window anchored on speculative narratives. From their perspective, “MOAR” credit and leverage drive prosperity, hence the revival of various forms of leveraged speculation, such as the carry trade. 

Put differently, Main Street woes accrue to the benefit of the Wall Street class around the world. 

Has the Marcos-nomics Liquidity Driven Rally Broken the SONA Cycle?

Back home, while the BSP rate cut(s) has been worshipped by the establishment as the path to economic nirvana, the rallying PSE instead reflects the full rollout of “Marcos-nomics”—including the BSP’s easing—manifested through liquidity growth.

Figure 2

The PSEi 30 rallied by 3% for its second-best weekly showing of the year, mainly due to Friday’s 2.31% spike.

Sharp changes in liquidity conditions have influenced the PSEi 30 in a time-lag. (figure 2, upper graph) 

The liquidity-driven PSE may have broken the SONA cycle. (Figure 2) 

However, was the PSEi 30’s rally really about rate cuts? The devil is always in the details. 

PSEi 6,850: Targeted Heavy Pumps on ICT, ALI and a Select Few

Figure 3

This week’s rally was widespread across the PSEi 30, with 18 stocks rising, 11 declining, and one remaining unchanged. (Figure 3, topmost visual) 

However, it was ICTSI’s [PSE: ICT] massive 10.4% weekly surge that contributed significantly to the index’s performance. (Figure 3 middle chart) 

ICT's share of the free float-adjusted market cap of the PSEi 30 soared by 7.7% from 10.06% to an all-time high of 10.84%. It is closing in fast on the largest firm, SM, with a free float cap of 14.44%. 

Ayala Land's [PSE: ALI] 10.33% gain provided flanking support. Ayala Land's free float market cap also surged by 7.6% from 5.75% to 6.19%. 

The substantial rebounds of Jollibee (9.2%) [PSE: JFC] and Meralco (8.53%) [PSE: MER] helped too. Up 19%, Converge [PSE: CNVRG] was this week's best performer. However, from the free float market cap standpoint, their contribution remained negligible. (Figure 3 lowest graph)

Understanding the distribution of price changes in the PSEi 30's market cap provides significant insight into the price dynamics of the index.

For instance, while most people call the PSEi 30 the "market," an index with 5 issues driving it skews this holistic principle. As of August 16, the top 5 issues in the PSEi 30 carry a free float weight of 50%, while the top 10 account for 72.9%.

The fact that a few issues comprise the weightings of the PSEi 30 deforms the index's representation, making its price directional movements vulnerable to manipulation.

As a Global Company, ICT is Sensitive to Fed Actions; Debt Outgrows Income

Why would the investing public panic-bid on ICT shares when its revenues are principally derived from international sources? ICT is more exposed to the Fed's actions than the BSP's.

Figure 4

And why the parabolic price action when ICT’s debt is growing faster than its income? In H1 2024, ICT’s debt grew by USD 630.6 million against a net income expansion of USD 113.87 million, meaning that for every USD increase in net income, it drew USD 4.5 of credit. Consequently, interest payments have also surged. How sustainable is this? (Figure 4, topmost window)

Besides, ICT looks susceptible to adverse global events like a hard landing or a recession, as well as bellicose geopolitical developments.

Rate Cuts Driven Rally? Why the Divergence Between the Real Estate and Financials?

Interestingly, while banks and real estate are supposedly the prime beneficiaries of the BSP’s easing, BDO declined by 1.6%, and the relatively modest increases in Bank of the Philippine Islands [PSE: BPI] by 2.12% and Metrobank [PSE: MBT] by 3.7% led to a reduction in their share of the free float index.

On the other hand, ALI’s 10.33% spike, backed by SM Prime Holdings [PSE: SMPH] with a 3.4% gain, increased their index weight. The result is a divergence in the performance of interest-sensitive industries. (Figure 4, middle chart)

It’s not just the PSEi 30; members of the financial index (ex-PSE) and the property index also exhibit the same skew. Gains were seen in most constituents of the Property index (67%, average +1.47%) compared to the Financial index (42%, average all -.43%, average index -2.6%).  (Figure 4, lowest table)

Interestingly, the two PSEi 30 property firms account for 73.7% of the industry’s index, while the three banks comprise 90% of the 8-member Financial index (ex-PSE).

Distortions in Volume: Mounting Concentration Risks

Figure 5

The distortions are even apparent in trading volume. The rising share of ICT and the telcos (PLDT, Globe Telecoms, and Converge) in the mainboard volume has been accelerating, indicating intensifying speculative interest. Their share of the mainboard volume reached 22.25% in the week of August 16th, higher than their 2024 seven-month aggregate of 21.9%. (Figure 5, upper graph) 

Interestingly, despite the PSEi 30 at 6,850, weekly volume remained lackluster. That is to say, volume remained concentrated in PSEi 30 firms. The top 20 most active issues accounted for 84% of the main board volume. (Figure 5, lower chart)

Mixed Breadth, Foreign Inflows and More Signs of Concentrated Activities

Figure 6

And while the positive advance-decline prevailed at the PSEi 30 over the week, even with Friday's 134-68 differentials, breadth was barely positive (495-476) in favor of the buyers this week. (Figure 6, upper pane)

And yes, "foreign buying" indeed helped. PHP 1.44 billion of foreign inflows was reported for the week, while foreign participation accounted for 38.8% of the overall main board turnover.

The top 10 brokers also constituted 54.74% of the weekly mainboard volume.

All of this suggests that trades were hardly dispersed but rather concentrated, mainly among institutional brokers (domestic OFCs and foreign).

Or, the positive headlines may have misled the public to believe in whatever increases in the PSEi 30 means relative to the underlying activities.

Which History will Rate cut(s) Rhyme? 2011 or (2016) or the 2018 Episode?

Finally, as previously mentioned, unlike in 2011 and 2016, where rate cuts led the PSEi 30 to soar, 2018 saw the reverse—rate cuts led to a decline in the PSEi 30. Balance sheet conditions (public and private) played an important role in this difference. So far, the PSEi 30 appears to be following the 2016 pattern in its current run. Of course, Marcos-nomics stimulus could be the defining nuance.  (Figure 6, lowest chart)

Yet it will be interesting to see how lasting such low-volume parabolic pumps last.

Be careful out there.

 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

 

The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be― Carmen M. Reinhart

In this issue 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness 

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt!

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

The BSP opened its series of monetary easing with a rate cut last week validating our thesis that the unannounced "Marcos-nomics stimulus" is on a roll!

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

Bullseye!

In its second phase of the unannounced Marcos-nomics stimulus, the BSP (Bangko Sentral ng Pilipinas) began its campaign to formally ease financial conditions with its first rate cut.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden. 

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt. 

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance. 

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus." (Prudent Investor, July 2024; bold original) 

GMA News, August, 15, 2024: The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce policy rates by 25 basis points, the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023. 

Why would the BSP start a series of rate cuts with a Q2 headline GDP of 6.3% (6% for the 1H GDP)? 

Yet, the BSP continues to confuse the public by hedging its position with a "rinse and repeat" stance: We will cut, we will not cut, we will cut, we will not cut... to thy kingdom come. 

Just a day before, a business media outlet even cited the BSP as having ""more room to stay tight" after better-than-expected gross domestic product (GDP) growth in the second quarter." 

Stay tight, then cut rates? Incredible. 

For a supposedly data-driven institution, why fixate on interest rates while ignoring the financial and monetary developments despite their actions?

Figure 1

For instance, the BSP’s report on total financial resources (TFR) rocketed by 10.54% to a record Php 32.332 trillion last June, with the banking system, led by the Universal and Commercial banks, surging by 12.3%. (Figure 1, upper window)

Aggregate TFR and bank FR amounted to 128% and 107% of GDP, respectively. 

That is to say, not only have growth rates been accelerating, but banks have also been deepening their stranglehold over the nation’s financial resources—which alternatively translates to an escalation of concentration risk. (Figure 1, middle graph) 

Needless to ask, why would TFR and bank assets skyrocket if rates have been "tight?" Or, why the crescendo of systemic leverage? 

Amazing. 

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains 

Getting back to the essence of the Marcos-nomics, despite the Orwellian language, why the cut rates? 

To gauge the heartbeat of consumers, we use the PSE’s Quarterly Report (17Q) to analyze the quarterly activities of the major non-construction retail chains listed on the stock exchange (SM Retail, Puregold, Robinsons Retail, Philippine Seven, SSI Group, and Metro Retail Group). 

The growth rate of BIG 6 retail chains bounced marginally from the Q1 low of 5.13% to 7.22% in Q2.  However, since peaking in Q3 2022, its growth rate has been slowing—exhibited by the downtrend. (Figure 1, lowest image) 

On the other hand, since hitting a low of 10.6% in Q3 2023, the nominal retail GDP has improved in the last three quarters—with Q2 posting a 12.8% growth.  The revenues of the BIG 6 accounted for an estimated 24.6% share of the Philippine retail market, based on the retail GDP. 

The huge variance in growth rates between the revenues of the BIG 6 tell us that either the NON-listed retail chains OUTPERFORMED, or that the retail GDP has been exaggerated. 

The thing is, the growth rate may differ, but the trends resonated. 

Real consumer GDP also corroborated the slowdown. 

In the first two quarters of 2024, real consumer spending grew by 4.6%. 

The slowdown in consumer spending is just one aspect of the complex chain of people’s actions.

Figure 2

While consumer spending has slowed, loans of the BIG 5 retail chains (excluding SM Retail) hit an all-time high in Q2. (Figure 2, topmost graph) 

As banks continue to shift their portfolios toward consumers—with the gap in favor of consumer lending reaching its highest-level last June—credit card and salary loan non-performing loans (NPLs) have accelerated in Q1 2024. (Figure 2, middle and lowest charts)

Figure 3 

This represents a breathtaking structural transformation anchored on Keynesian ideology that the consumer drives the economy. (Figure 3, topmost graph)

Unfortunately, despite the unprecedented metamorphosis, increased leveraging has only resulted in the material slackening of consumer spending.

Essentially, the consensus comprised of media, experts and officials has overlooked the importance of balance sheet conditions and productivity!

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

But there’s more.

The BSP wasn’t transparent enough to reveal that despite the seismic transformation of its business model and the all-time highs in credit expansion within the Philippine banking system, the industry has experienced an erosion of profit growth since Q2 2022—coinciding with rising rates. (Figure 3, middle diagram)

From a low of 2.95% in Q1, bank profits increased by 4.1% in Q2 2024. The data exhibit the sustained corrosion of bank liquidity despite the three-year streak in profit growth.  Bank’s cash-to-deposit and liquid asset-to-deposits on an 11-year downtrend.  (Figure 3, lowest chart)

In my humble opinion, these bank profits represent accounting profits because they conceal massive losses through Held-to-Maturity (HTM) holdings, opaqueness in capital conditions, and unpublished NPLs due to subsidies and various relief measures.

Figure 4

In any case, the big three PSEi banks saved the PSEi 30's Q2 net income activities from outright stagnation.

Net income by the non-financial members of the PSEi slightly contracted by 0.13%. However, the 13.71% net income growth of the PSEi 30 banks boosted the aggregate net income growth to 2.35%. (Figure 4, upper table)

Meanwhile, despite disinflationary forces, revenue growth increased by 9.14% in Q2, pushing the first semester’s topline up by 8.71% (to be discussed in another post).

In brief, it’s not just consumers; the overall slowing of the economy has been evident in the topline and bottom-line performance of the PSEi 30. We will omit the debt conditions of the PSEi 30’s non-financials from this discussion.

As a side note, why then the PSEi 30 pump?

Think of it this way: why the slowdown in the PSE’s performance despite record bank lending and the soaring expansion of systemic leverage (exhibited by members of the PSEi 30)?

Consumer spending per capita GDP peaked in Q1 2021 and has turned south in the face of historic levels of systemic leverage—comprising the formal credit (bank credit plus public debt) system, which accounted for 112% of the annualized 2024 GDP! (Figure 4, lower graph)

Figure 5

As it stands, this monumental build-up in systemic leverage translates to escalating hidden financial skeletons in the form of balance sheet mismatches—which have yet to be revealed. UC bank and public debt accounted for 108% of the annualized 2024 GDP. (Figure 5, topmost chart)

Incredible.

In a nutshell, the Marcos-nomics stimulus via the BSP’s rate cut also represents the RESCUE of the banking system (Pandemic Bailout Template 2.0).

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt! 

With the slowing of the real economy, the government has stepped up the tempo of its spending to boost the statistical economy, GDP.

This represents the opening salvo of Marcos-nomics. Besides, the torrent of spending is all about politics: pre-election funding, the subtle pivot to a war economy, the deepening administrative (infrastructure and bureaucracy) and the welfare state.

Record Q2 spending bolstered the Q2 budget deficit and accounted for a direct 27.4% share of the Q2 GDP, the second largest in GDP’s history (as previously explained). (Figure 5, middle chart)

Since debt has financed the Marcos-nomics stimulus, the rising but flawed debt-to-GDP metrics should increase further. With it, the debt servicing-to-GDP ratio should also rise.

If anything, both debt-to-GDP and debt-servicing-to-GDP ratios have now exceeded pre-Asian crisis levels. (Figure 5, lowest image)

This signifies the primary reason why the BSP cut rates.

Its recourse to deficit spending means more debt, so the BSP must reduce its cost of servicing to allow for or accommodate more debt!

Anyway, according to the government officials, there is "Nothing to worry about PH debt." Debt won’t matter until it does. Alternatively, this could also mean "never believe anything in politics until it has been officially denied." 

Furthermore, as with the pandemic template, liquidity injections should represent the third phase of the Marcos-nomics stimulus. 

Figure 6

The BSP's net claims on the Central Government (NCoCG) remain adrift at near record levels— indicating near-record holdings of government debt by the BSP. What tightening? Where? (Figure 6, topmost chart)

The all-time highs in public spending and bank lending should translate into HIGHER liquidity growth. The growth of BSP’s currency issuance has been accelerating since April 2024, rising by 7.4%—its highest since December 2022!

Should public spending, bank lending, and bank (NCoCG) fail to deliver the various government headline targets, expect the BSP's NCoCG to explode higher.

The fourth and final phase of the Marcos stimulus would involve expanding subsidies and widening the coverage of various relief measures for the banking system. 

Again, this would mirror the Pandemic Bailout Template 2.0. 

All these said, the rebound in liquidity growth should manifest in higher inflation and reinforce the uptrend of the USD-Philippine peso exchange rate. (Figure 6, middle and lowest graphs) 

Moreover, the Fed has long been used by the BSP as a pretext for keeping its stance, unfortunately, waiting for the FED seemed like "Waiting for Godot," so the BSP relented and eased ahead of the Fed.  This should provide further fuel to the bull market of the USDPHP over time. 

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

Lastly, the BSP rate cuts validated the Philippine treasury markets.  

The curve’s transition from a steepening to a bullish flattening to an inversion in the belly (2-7 years yield) highlights disinflation, rising uncertainties and the growing slack in the real economy (rising risk of recession). 

Figure 7

The belly’s inversion only deepened right after the BSP’s rate cut (as of August 16th) 

And don’t just take it from me, a chart from the BSP’s 2023 Financial Stability Report expresses this. (p.13) 

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

So, there you have it. 

Last week’s BSP rate cut validated our thesis of a "Marcos-nomics stimulus."

It represents the second phase of the tacit bailout of the deficit-spending-driven GDP, the banking system, and the firms of elites. The other objectives are the financing of the growing domain of various political agendas—mostly pre-election spending, the warfare state, infrastructure, and the bureaucratic state. 

One can expect the liquidity injections via the BSP and the banking system to account for the third phase of the stimulus program. 

To complete the fourth and final phase of the Pandemic Bailout Template 2.0, various subsidies and relief measures will be implemented to support the banking system. 

Despite the interim disinflation phase, the sustained bailout means the re-emergence of the third wave of inflation and the strengthening of the USD-Philippine peso bull market. 

The real tightening is about to come. 

Good luck to those who believe in the illusion that manipulated stock market pumps will translate into economic prosperity. 

___

References:

Prudent Investor, Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? July 28,2024 

Other post on Marcos-nomics: 

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024 

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30, 2024

 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Doom-loops don't occur in isolation: they interact with each other, reinforcing each other. Attempts to suppress one doom-loop by papering over the unwelcome reality accelerate other doom-loops—Charles Hugh Smith 

In this short issue 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

I. July’s CPI Momentum Accelerates

II. July Headline and Core CPI’s Diametric Paths 

III. Philippine Treasury Market Defied the July CPI Data

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Not only inflation, but stagflation remains a principal risk to the Philippine political, financial, and economic landscape

Inquirer.net, August 6, 2024: Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported on Tuesday. Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year…Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.  

Some observations from the July CPI Data:  

I. July’s CPI Momentum Accelerates

Figure 1

First, a greater than 0.5%—but less than 1%—spike in the Month-on-Month (MoM) growth rates has typically been a harbinger of a sustained uptick in the Headline CPI Year-over-Year (YoY). July’s MoM rate jumped by 0.72%. (Figure 1 upper image) 

Does this imply a higher CPI in August and the strengthening of the third wave of this first CPI cycle?

II. July Headline and Core CPI’s Diametric Paths 

Second, while the Philippine headline CPI surged from 3.7% in June to 4.4% in July, core CPI dropped from 3.1% to 2.9%. The gap between the headline and core reached its widest level since 2022. (Figure 1, lower graph) 

In the past, this chasm was a result of the headline rising faster than the core or vice versa. Or, while both were headed in the same direction, the divergent pace or speed resulted in the disparity. The recent gap signified a product of path divergence. 

Energy was the primary source of July’s "inflation." According to the BSP, although food inflation also accelerated due to faster price increases of meat and fruits, "the uptick in July inflation was traced mainly to non-food inflation, particularly higher electricity rates and upward adjustments in domestic prices of petroleum products."

Figure 2

Interestingly, the transport CPI spiked from 3.1% to 3.6% despite the moderation in global oil prices as measured by the US WTI. (Figure 2, upper window)

According to the BSP’s inflation basket, food, transport, electricity, and gas constitute 53.5% of the CPI basket. 

However, the antipodal directions indicate generally weak demand for non-food and transportation items. 

Could this signify an escalation of stagflation? 

Moreover, the weakening MoM change in the core CPI has barely supported the rise in general prices in the economy. (Figure 2, lower diagram) 

III. Philippine Treasury Market Defied the July CPI Data

Figure 3 

Next, despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Figure 3, upper chart) 

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation 

Needless to say, the escalating tensions between the deflationary and inflationary forces in the economy should lead to more volatility, and this directional impasse will likely be resolved by (path-dependent) government policies. 

Or, while we are not fans of government statistics, should the government maintain the pace or speed of the latent "Marcos-nomics stimulus," forces of inflation are likely to prevail in this phase of the CPI cycle. 

Marcos-nomics, as Q2 GDP has validated, will continue to anchor on boosting GDP (infrastructure and welfare), funding pre-election, and defense spending. 

That is to say, such stimulus would increase demand by intensifying systemic leverage. 

Figure 4 

The combination of record Universal Commercial Bank lending levels—or rebounding growth rate—and the upsurge in the government’s deficit spending has prompted the most liquid of the money supply measures (M1) to accelerate upward. (Figure 3, lower chart, Figure 4, top and bottom graphs) 

If sustained, this should send the CPI higher over time. 

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

Lastly, using official data, the CPI reveals shades of broadening inequality.

The Bottom 30% (B30) income households buy at the same prices as others.

Figure 5

In July, the headline CPI rose faster than the B30, which pulled their spread marginally lower after reaching 2018 highs last June. (Figure 5, topmost graph) 

However, the spread in the Food CPI between the headline and the B30 remains wide and at 2022 levels. (Figure 5, middle image) 

The widening gap in the PSA’s B30-headline inflation data partially confirms a private sector poll’s finding that hunger rates have been rising—not limited to the B30 class, but also on self-poverty ratings. (Figure 5, lowest chart) 

Stagflation is already present among the average citizens. 

Until the government and the BSP discipline themselves from their free-money "trickle-down" policies, stagflation will remain a primary political-economic-financial risk.

  

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

 

Measurement problems abound. The housing component, frequently constituting a quarter of inflation indices, often uses the owners’ equivalent rent, which is highly subjective, with a small change in weighting—such as for single-family homes—affecting the outcome. There are multiple measures—consumer price index, producer price index, GDP price deflator— that produce different, often irreconcilable, results. Data-dependent central bankers can fit the statistics to policy—Satyajit Das 

In this issue:

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

I. June 2024 Philippine Employment Rates Hit Second to the Highest Level: A Statistical Pump

II. Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus

III. The Unintended Consequences of Raising Government Salaries in the Philippines

IV. Q2 GDP: Consumers Struggle Under Marcos-nomics

V. The GDP is Debt: GDP Won’t Outgrow Total Debt or Systemic Leverage

VI. Q2 GDP Boosted by Devaluation Effect Amid Semiconductor Export Plunge and Stagnant Capital and Consumer Goods Imports

VII. The Money Illusion: Utility GDP Manifest ‘Undeflated’ Inflation; Real Estate GDP Reveals Worsening Signs of Malinvestments

VIII. The Disconnect between GDP Growth and the PSEi 30’s Performance

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

"Marcos-nomics stimulus" powered Q2 GDP’s 6.3% as consumers struggled and as the government juiced up employment rate data

I. June 2024 Philippine Employment Rates Hit Second to the Highest Level: A Statistical Pump 

Businessworld, August 11, 2024: THE UNEMPLOYMENT RATE in June fell to 3.1%, the lowest in two decades, as hiring in the construction sector surged, the Philippine Statistics Authority (PSA) reported on Wednesday. Preliminary data from the Philippine Statistics Authority (PSA) showed the jobless rate slipped from 4.1% in May and 4.5% in June 2023. The June unemployment rate was the same as in December 2023. It was also the lowest jobless rate since April 2005, when the statistics agency revised its definition of unemployed to Filipinos aged 15 years and older without a job, available for work, and actively seeking one. This translated to 1.62 million unemployed Filipinos in June, down by 486,000 from 2.11 million in May. Year on year, unemployment went down by 707,000 from 2.33 million in June 2023. 

Beyond such sanguine statistics lies the issue of how this record number of employment rates was achieved. 

Essentially, who has been investing?

Figure 1

The Philippines has a low savings rate (even when calculated based on inflated GDP statistics), foreign direct investments (FDIs) remain subdued (despite Php 4 trillion promises of investment from geopolitical allies of the administration), and the distribution in the growth of the Universal Commercial (UC) bank credit expansion remains heavily skewed toward consumers and the real estate sector. (Figure 1)

The next question is: who has been hiring?

Figure 2

The June data record employment data reveals that the primary source of hiring has been the construction sector: quarter-on-quarter (1.2 million), month-on-month (680,000), and year-to-date (556,000). This massive job expansion largely stems from government-related projects, as confirmed by the industry’s boost to the Q2 GDP. (Figure 2, lowest graph)

The second-lowest unemployment rate was supported by a jump in labor participation rates. (Figure 2, topmost chart)

On a month-on-month and quarterly basis, the agricultural sector represented second-largest employers. Despite staggering losses due to weather-related challenges (Typhoon Carina estimated at Php 3.04 billion and El Niño’s Php 9.5 billion) and structural issues from inflation and other industry imbalances (e.g., entrenched protectionism), the agricultural sector added 571,000 jobs month-on-month and 497,000 jobs quarter-on-quarter. (Figure 2 middle window)

Ironically, according to the Philippine Statistics Authority (PSA), agricultural volume reportedly plunged by 13% in Q2.

Government employment data suggest that agricultural investors appear to be immune to profit and loss conditions, as evidenced by the hiring spree despite ongoing losses and stagnation.

In reality, the only entity not subject to profit and loss is the government, whose existence depends on forced transfers from the public.

The trade industry was the third-largest employer month-on-month in June. Given the lackluster performance of consumers, who have become heavily dependent on credit, it is likely that we should see a reversal soon.

The PSA’s labor survey data represent one of the 31 data sources used for GDP calculation. The Consumer Price Index (CPI) and GDP are highly sensitive political-economic data, which means they are prone to reflecting the agenda of their creators rather than providing unbiased and objective estimates. 

Let us hear it from the horse’s mouth (bold added): 

CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases. (PSA, FAQ on CPI) 

The System of National Accounts (SNA) helps economists to measure the level of economic development and the rate of economic growth, the change in consumption, saving, consumption, investment, debt and wealth of the economy. From the data of SNA, economists can either forecast the future growth of the economy or study impacts on the economy and the institutional sectors of identified government policies and programs. (PSA, FAQ on CPI)

Recent data suggests that authorities have inflated employment figures to boost the GDP. 

II. Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? (Prudent Investor, June 2024) 

It is not helpful when the establishment confuses the GDP with the overall economy, for the simple reason that the GDP has been skewed to reflect the growth of the government and the elites—the "trickle-down syndrome." (Prudent Investor, July 2024)

So, didn’t we get it right? 

While publicly unstated by authorities, the Q2 GDP growth of 6.3% represented the "Marcos-nomics" stimulus, which was anchored by near-record historic spending in Q2.

Figure 3

First, despite the cheerleading by the establishment and mainstream media, the Q2 2024 GDP remained below the exponential trend line of pre-pandemic nominal and real GDP. (Figure 3, topmost image)

Second, Q2 GDP was, in essence, another story of "Marcos-nomics ": government spending surged by 14.8% (nominal) and 10.7% (real), with government GDP posting a 16.8% share, marking its fourth highest level in the national accounts. (Figure 3, second to the highest window)

Once more, Q2 GDP validated our analysis and forecasts.

Third, Government GDP understated the public sector’s contribution to national GDP. Construction GDP was chiefly responsible for the 9.5% and 11.5% growth spikes in gross fixed capital and gross capital formation, accounting for 71.1% and 71.25% of the latter, respectively. (Figure 3, second to the lowest graph)

Importantly, real Construction GDP also represented 19.4% of the national GDP—an all-time high! 

As a side note, the surge in jobs in this sector most likely relates to government-related construction projects or contractors. 

Combined with government spending, direct government expenditures accounted for 27.4% of the Q2 2024 national accounts—the second highest ever! (Figure 3, lowest image)

Of course, this data exclusively represents direct expenditures.

The private sector’s direct contribution to government political projects (e.g., PPPs), as well as the direct and indirect supply and demand chains of these entities and those associated with the bureaucracy, are not included.

Briefly, the government’s direct and indirect contributions to the economy may easily account for about two quarters or approximately 40% of GDP.

So, while the government promotes partial economic liberalization to the public (benefiting the elites), it has been centralizing the economy through the administrative and bureaucratic state, the welfare state, and the warfare state.

The government doles out crumbs of liberalization while fortifying its political stranglehold on the economy.

Domestic wars (against vices such as drugs and POGOs, as well as inflation and poverty) and the promotion of nationalism to expand the warfare state has led to increased socialism or neo-socialism (fascism/cronyism). 

The essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income. (Mises 1919) 

This shifting of income is most evident in the erosion of consumer spending. 

III. The Unintended Consequences of Raising Government Salaries in the Philippines 

As an aside, the political leadership has announced that it will begin increasing salaries for government bureaucrats in three tranches. 

Beyond the overall impact of adding to the record fiscal deficit, if government pay levels rise above those in the market economy, it could attract more individuals into the bureaucracy at the expense of the private sector. The rising cost of employment would exacerbate the crowding-out effect on the private sector. 

Since the government does not generate wealth on its own but instead extracts resources from the private sector through direct and indirect taxes, any increase in household spending by bureaucrats is likely to be offset by a decrease in spending by the private sector.

Moreover, this situation could lead to greater politicization of the hiring process, entrenching corruption, favoritism, and nepotism.

Jobs may increasingly be awarded to the highest bidders, friends, personal networks, or as payoffs for political favors. There will likely be more "ghost employees."

Consequently, the motivation of those in power is to increase economic interventions by introducing more laws, funded by the continuing expansion of the government’s budget, which should deepen the centralization process through the expansion of the administrative state. 

Figure 4 

According to the Civil Service Commission, the number of government employees in the new administration vaulted in 2023.  Consider how rising salaries in 2024 might lead to further increases in government jobs. (Figure 4, highest diagram) 

IV. Q2 GDP: Consumers Struggle Under Marcos-nomics 

Circling back to consumer spending: 

Although real consumer spending grew at the same rate of 4.6% in Q1 and Q2, the share of real consumer GDP plummeted from 74.4% to 67.8% as the share of government spending spiked. (Figure 4, second to the highest pane)

This trend is not an anomaly; such an antipodal path has emerged since the advent of the new millennium. This divergence accelerated in 2016 and intensified further during the pandemic recession.

Moreover, since peaking in Q1 2022, the downtrend in consumer spending growth continued into 2024, even as trade and retail GDP marginally outperformed at 6.6% in Q1 and 5.8% in Q2. (Figure 4, second to the lowest chart)

They failed to recognize that BSP policies—characterized by liquidity injections and bank credit expansion rather than productivity growth—were the primary drivers of this trend.

In other words, a large segment of retail entrepreneurs has clearly misread signals indicating that the recent bout of "revenge" spending is "sustainable."

Consequently, the rising vacancies in commercial, office, and residential properties translate to mounting losses and rising credit delinquencies that have yet to surface in bank data.

The poor top-line performance of several PSE-listed firms, which have reported their Q2 2024 results, underscores this issue.

Furthermore, consumer spending per capita continues to erode, ironically, despite record-high employment rates.  More evidence of inflated employment rates? (Figure 4, lowest graph)

V. The GDP is Debt: GDP Won’t Outgrow Total Debt or Systemic Leverage

By the same token, rising leverage has barely added to consumer spending.

UC bank lending to consumers grew by 25.01% to a record Php 1.4 trillion (excluding real estate loans) last June, marking its sixth consecutive quarter of over 25+% growth. In contrast, nominal consumer spending GDP grew by 4.6% in the first half of the year. This translates to Php 5 borrowed for every Php 1 of consumer GDP produced!

Incredible.

Figure 5

In the same vein, historic levels of systemic leverage (public debt plus UC bank credit) have barely supported growth in consumer spending per capita. (Figure 5, topmost image)

The aggregate UC Bank credit plus public debt in June amounted to an unprecedented Php 27.23 trillion, representing 108% of the annualized 2024 GDP!

Authorities are engaged in peddling smoke and mirrors, or advocating the GDP myth, when they claim that the GDP growth rate will outgrow public debt.

Fundamentally, a significant portion of GDP is derived from debt-financed public spending, which means public debt is a crucial factor behind GDP.  So how can GDP outgrow debt when deficit financing—the current driver—is based on debt? 

Secondly, similar to the period from 2009 to 2018, when slower public spending reduced the public debt-to-GDP ratio, banking debt to GDP took over. Banking credit expansion to the private sector became the principal source of finance for government revenue. (Figure 5, second to the highest diagram) 

Debt doesn’t melt away; it is juggled! 

In summary, under today’s de facto fiat money system, GDP is essentially debt. 

Today, we are now witnessing the twin engines of debt operating at full throttle. 

VI. Q2 GDP Boosted by Devaluation Effect Amid Semiconductor Export Plunge and Stagnant Capital and Consumer Goods Imports 

The devaluation effect or stronger US dollar FX via a weaker peso also magnified the contributions of external trade to GDP. 

Yet, the 29.5% plunge in semiconductor exports underscores the fragile state of local producers. Real manufacturing GDP increased by 3.6% (slower than the 4.4% growth in Q1), even as UC bank credit growth to the sector rose by 8.94% (down from 10.11% in Q1). (Figure 5, second to the lowest window) 

Stagnant nominal imports of capital and consumer goods in June further reinforce the lethargy of the private sector. (Figure 5, lowest chart) 

In addition to the slowing retail GDP, other sectors in the industry show signs of weakness.

Figure 6

The previously smoldering GDP of the Accommodation and Food Services sectors has dramatically slowed to their lowest growth levels since Q1 2022. Accommodation GDP fell from 16.1% to 12.9% in Q2, while Food Services GDP dropped from 11.8% to 9.4%. (Figure 6, topmost chart)

In seeming confirmation, air transport Cebu Pacific's Q2 2024 revenue growth of 15.3% pulled its H1 2024 growth lower to 18.1%. Meanwhile, PAL's Q2 2024 revenues contracted by 0.3%, which also weighed on its 1H 2024 revenue growth, reducing it to 3.97%.

Still, the transport GDP surged from 5.4% in Q1 to 14.8% in Q2. Air transport GDP spiked 22%.

VII. The Money Illusion: Utility GDP Manifest ‘Undeflated’ Inflation; Real Estate GDP Reveals Worsening Signs of Malinvestments 

Furthermore, while the Utilities GDP (electricity, steam, water, and waste management) outperformed in Q2 2024, rising from 4.3% in Q1 to 6.1%, its real growth (despite being netted out by the deflator) reflects the oscillations of the CPI. (Figure 6, middle image)

This highlights the "money illusion"—GDP attributed to growth when, in fact, it reflects changes in spending caused by price fluctuations.

Elevated inflation, rising interest rates, and increasing leverage and non-productive economic activities have severely constrained consumer spending.

Lastly, the supply side segment of the Real Estate (RE) sector via its GDP surged from 4.5% in Q1 to 7.2% in Q2 2024.

The industry's GDP has been backed by a surge in loan growth.

UC bank lending to the RE sector’s supply side expanded by 12.34%, marking growth rates above 10% for the eighth consecutive month.

Interestingly, despite the sector’s strong Q2 GDP performance, its value-added contribution to national accounts continues to dwindle, with its share of the total falling from 5.6% to 5.4% in Q2 2024, reinforcing its downtrend. (Figure 6, lowest graph)

On the other hand, the share of bank lending to the sector continues to rebound after an interim low in Q3 2023. 

That is, more borrowing results in lesser and lesser value-added contributions or diminishing returns, which are signs of escalating malinvestments. 

VIII. The Disconnect between GDP Growth and the PSEi 30’s Performance

Anyhow, the establishment and social media seem desperate to see the PSEi 30 rise, attributing any good news to it.

For instance, some claim that Friday’s rebound was caused by a "stronger economy. " Baloney. 

On the contrary, this reflects the politicization of the PSEi 30 through attribution bias: if the index falls, external forces are blamed; but when it rises, credit is claimed for any internal factor, with indirect allusions to politics.

Figure 7

Of course, cheerleaders—who don’t declare their interests—evade the details. They fail to mention the engineered pumps. (Figure 7, topmost visuals) 

Friday’s syndicated rescue operations, which centered on the Sy Group of companies (comprising 32.4% of the PSEi 30 as of August 10th), erased the week’s losses and delivered a 0.64% weekly return on mediocre volume. 

Yet, why hasn’t GDP been boosting the PSE? 

First, GDP is not the economy.  While it attempts to measure the complex nature of millions of moving parts operating spontaneously—supposedly reflecting the economy—it cannot do so effectively. 

This is because one cannot average spending on rice with subscriptions for software. Individual utilities are not only subjective but also change frequently. I may want a burger for one meal but spaghetti for the next, depending on my means and willingness to pay the offered price. 

Second, the distribution of costs and gains is uneven. 

Record government spending benefits politicians, the bureaucracy, and their cronies, while small and medium enterprises (SMEs), which can hardly access formal credit, barely benefit from such political activities.  Instead, the costs are borne by average citizens. 

In a corporatist or neo-fascist state, benefits are concentrated while costs are diffused, resulting in privatized gains and socialized losses. 

Third, despite the myriad regulations designed to curtail and control it, market economies operate on the division of labor and division of knowledge. Unfortunately, specialization, knowledge, and entrepreneurial skills cannot be averaged. 

Fourth, statistics are historical accounts derived from selective assumptions that incorporate specific inputs and calculations. They do not encompass all the causal factors that lead to multifarious and intertemporal outcomes. 

Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Figure 7, middle window) 

The GDP trendline has failed to revert to its former trajectory, which coincides with the PSEi 30’s bear market. (Figure 7, lowest chart) 

Given its structural trickle-down political-economic framework, which is entirely dependent on debt, it also bears substantial balance sheet risk. 

The consensus overlooked the last and most critical aspect of the economy. 

Fifteen minutes of glory doesn’t a bull market make. 

____

References: 

Philippine Statistics Authority, Frequently Asked Questions, Consumer Price Index, psa.org.ph 

Philippine Statistics Authority, Frequently Asked Questions, Philippine System of National Accounts (PSNA), psa.org.ph 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30, 2024 

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Ludwig von Mises, Nation, State, and Economy, 1919 p.190, Mises.org