In this issue:
Money Printing: BSP vis-à-vis the Central Bank of Nigeria. BSP’s Forex Holdings Rockets to Uncharted Zone!
-Learning from The Central Bank of Nigeria’s QE
-The Bangko Sentral’s Nigerian Approach
-Why Inflation Will Soar and the Peso will Plunge (Because the BSP Persists to Inflate the System!)
-Debunking the Weak Peso Equals G-R-O-W-T-H Myths
-More Record Highs: BSP’s Forex Holdings Rockets to Uncharted Zone!
Money Printing: BSP vis-à-vis the Central Bank of Nigeria. BSP’s Forex Holdings Rockets to Uncharted Zone!
Learning from The Central Bank of Nigeria’s QE
The Central Bank of Nigeria (CBN) has resorted to the printing press, pointed out one international media, to finance the government’s expenditures which raised “low-intensity alarm” to some economists and financial practitioners
Between December 2013 and April 2017 for instance, the CBN’s “claims on the federal government” went from 678 billion naira to 6.5 trillion naira ($1.8 billion to $17.3 billion)—an almost 10-fold rise. These “claims” are made up of overdrafts, treasury bills, converted bonds and other such lending. For the most part, the issue has remained an obscure one that receives hardly any attention from local media.
But then, a couple of weeks ago, the CBN finally published the personal statements of the Monetary Policy Committee (MPC) members from the July meeting [PDF] and suddenly the alarm bells started ringing. The personal statement of Dr. Doyin Salami, a well-regarded member of the MPC noted for his straight talking, said the CBN was providing a “piggy-bank” service to the federal government. Specifically, he said [page 38]:
“Perhaps the most challenging of the present characteristics of the economy in Nigeria is the adoption of a quantitative easing stance by the management of the Central Bank. Monetary data shows a sharp rise in the extent of CBN financing of the government deficit.
“He quoted statistics that showed much of the rise in the CBN’s financing of the federal government have come since last December with its purchases of government bonds being the worst culprit with a 20-fold rise in 2017 alone. In effect, the CBN has been printing money to fund the government’s spending. The reason for this is, of course, clear—Nigeria’s government has not been able to recover in any meaningful way from the collapse in oil prices that has now entered its fourth year.
The depiction of CBN’s money printing episode captured in the above charts.
The CBN’s stock of Federal Government Securities (FGS) rocketed by 12.5x from November 2015 to May 2017. The CBN data can be seen here. CBN’s claims on FGS collapsed by 26% in August compared to May.
Because printing press money circulated into the economy, growth in domestic liquidity exploded upwards. Money supply growth, as measured by M2, (CEIC) rocketed to 22% in January 2017 from less than 5% in January 2016. Or, money supply expanded by about 4 times in one year! (see middle right) In April, M2 growth collapsed to just 4.8%.
The discharge of the waves of printing press money diffused into the real economy. The government’s measure of inflation (CPI) DOUBLED from a trough of about 9.2% in July 2015 to a high of 18.73% in January 2017! (see middle left) August CPI was lower at 16.01%.
The price pressures in the real economy forced the USD-naira peg to unravel in June 2016, where the Nigerian currency plummeted 30%. The second batch of devaluation occurred in August of this year where the naira plunged by another 13% against the USD. From June through last week, the USD naira has risen by about 78%!
To offset price pressures in the real economy, the CBN restricted bank lending by raising the cash reserve ratio (CRR) of banks. The article suggests that the CBN’s move was self-defeating since “starving it [the economy] of the credit” meant insufficient taxes to fund the government’s spending. Oil revenues contribute about 2/3 to state revenues, although the oil sector’s share of the economy has only been about 9%. The article assumes erroneously that credit automatically translates into economic growth.
Instead, the Nigerian government intends to issue $5.5 billion of Eurobonds by the yearend to take advantage of the cheap financing available, courtesy of the prevailing risk ON environment.
Apparently, the Central Bank of Nigeria has not only restricted credit expansion but likewise immensely reduced its subsidies to the Federal Government (as of this writing). The ramification of which has been the recent collapse in money supply growth which has percolated into the real economy through the lagged easing of price pressures. In response, devaluation pressures on the naira have subsided, where the spread between the official and black market rates has materially narrowed.
And it would seem that the “weak” dollar abroad has provided the Nigerian government an alternative avenue to obtain financing, hence, the proposed recourse of borrowing, instead of relying on central bank funding.
A discourse of the Nigerian economy has hardly been my purpose here. Instead, I used Nigeria as an example of a political economy that uses debt monetization (quantitative easing) as an implicit transfer mechanism to finance the government’s spending habits which repercussion has been to DEVALUE the currency.
The Bangko Sentral’s Nigerian Approach
Nigeria’s monetary policy experience reverberates with the Philippines.
Nigeria’s four charts, in the Philippine context, have been compacted into just two. But the cause and effects or the transmission sequences from such policies to their respective economies, as well as, to their currencies have essentially been the same.
Some differences and similarities of the BSP and CBN
Both governments have resorted to debt monetization or money printing to fund the central government’s deficit spending. Both governments embarked on QE coincidentally almost at the same time - end of 2015.
The difference has been in the DEGREE of monetization. Nigeria’s QE expanded 12x in 1.5 years as against 50% in 2.58 years for the BSP. In short, the BSP hasn’t been as aggressive as the CBN
Another difference has been Nigeria’s efforts to offset its QE by tightening relative to the Philippine experience where the BSP has been recalcitrant to minimize price instability.
The Philippine NG tried increasing its access to debt early this year. But this financing route has only reduced M3 growth, which filtered into the real economy as reduced topline or gross revenues and a downturn in consumer spending, particularly in the 1H. Such slowdown severely affected tax revenue collections. Thus, the BSP opted to reactivate its perceived free lunch nuclear option through invisible transfers to the NG.
The August money supply breakout (15.4%) has not only incited a breakthrough in the Phisix; it pushed September’s CPI back to the highs of March and April of this year at 3.4%.
Because the CPI is the most widely used in the calculation of the inflation rate and purchasing power of the peso, according to the Philippine Statistics Authority, it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy. Said differently, since the CPI represents a politically sensitive statistics, underreporting of price pressures should be expected. The PSA will soon release General Retail Price index which should provide clues to a less politically sensitive statistics.
I expect the CPI for the coming months to be a lot higher.
My anecdotal account: My neighborhood sari-sari store raised San Miguel Pale Pilsen by 7.4% this week while my favorite Bulaluhan increased its takeout packaged food products by 12%.
Why Inflation Will Soar and the Peso will Plunge (Because the BSP Persists to Inflate the System!)
Money has been awash everywhere.
During a recent saunter to a nearby mall, I noticed that a striking number of stores have recently closed. However, amazingly most of them have found immediate replacements.
That, for me, is what the BSP’s inflation targeting has been about; by enticing the banking system to throw money freely into the system, it puts faith that such actions would fire up GDP through the system’s escalating absorption of leverage.
It also exudes confidence that its current actions would cover up or rectify the previous errors by throwing money at them.
The BSP likewise wishes that through its direct financing of the NG’s spending such will have only magical effects on the economy.
Moreover, the BSP staunchly desires that by raising general price level it can wangle additional taxes for the government. Remember, taxes are all based on the NOMINAL peso value of incomes or sales or costs.
Yet the BSP can hardly anticipate or know where the newly issued money will flow, how the money will be used or spent, and most importantly, how dramatic increases in the leveraging affect the balance sheets of both lenders and borrowers as seen through the prism of the multitude of enterprises. All it does is to assume outcomes from its econometric models.
The interim increases in mall occupancy would temporarily boost revenues of these operators. But again, if new occupants largely financed their investments with credit, demand arising from the supply and demand chain of these enterprises will likewise be anchored on leverage. When system liquidity dries up, enterprises dependent on such leverage will be the first casualties.
Thus, the BSP has been unremitting with its push to inundate money into the system through the incumbent the emergency policies. Like in Nigeria, these factors “receives hardly any attention from local media” or from establishment experts. Does the BSP know something which it refuses to disclose in public? Demonstrated preference (actions) says YES!
And since free money creates an ephemeral upsurge in demand, which will barely be met by existing supply, prices, as a consequence, will rise. And surging prices adversely impact the purchasing power of the citizenry. Yes, disposable income will shrivel.
Rising prices will not just unsettle consumers; it will amplify price volatility and elevate business costs, thereby upsetting the entrepreneurs’ economic calculation. The manufacturing sector should be a noteworthy example which I will discuss once I get the full data.
Moreover, surging real estate prices will increase business and household rents too! Booming property represents a transfer of income from renters to property owners or managers. Nevertheless, rising rents would not only put a squeeze in the renter’s household income; it would stifle the entrepreneur’s or business income.
So even while free money abounds, the growing mismatch between consumer spending power and supply acquisitions will translate to saturation, gluts, oversupply or excess capacity. Hence, thespending from the limited growth in income, appended by credit finance spending, will be diffused among the faster-growing numbers of good suppliers or service providers. The outcome of which is to diminish company’s topline or gross revenues or in consumer spending. We have already seen this in the 1H [See Wow. Revenues of Listed Retail Firms Validate Slowdown of Consumer Spending GDP in 1H! August 28, 2017]
And in the context of the PSEi, because of the earnings constriction*, companies instead imbued significantly more debt* in the expectations to generate growth!
Nevertheless, the BSP seems to be doubling down. It has restarted the Nigerian route of NG subsidies.
However, I would part ways with Dr. Canlas in his suggestion that the vulnerability of such currency stems from speculative attacks than from the fundamental vantage point.
The point is since ALL actions have consequences, the chain effects in the pricing system of an economy from a policy of inflationary finance ultimately result to the depreciation of the currency which indulges in it. Speculative attacks are mainly manifestations of the adjustment process to the perceived mispricing and maladjustments from such policies. If there has been no imbalance to arbitrage on then “speculative attacks” won’t succeed or prosper.
The real time experience of Nigeria sets the template for such adjustment process.
The same template will apply to the Philippine peso.
Debunking the Weak Peso Equals G-R-O-W-T-H Myths
And here’s more.
The establishment will put a spin on the weak peso as having positive effects for the exports, investments, remittances and etc.
Let us go by the facts.
The USD peso has been on a LONG TERM annual uptrend since the 1960s. The CAGR of the USD peso from 1960 to 2016 has been 5.23%.
The current USD peso uptrend seems as making up for the recent cyclical reversal and could likely restore the over 50-year old trend.
Since the post-Asian crisis, exports as % share of GDP have FALLEN, regardless whether the USD peso firmed (1998-2005 and 2013-2016) or when the peso strengthened (2006-2012). The reason for this is beyond the peso.
In the meantime, the upside trend in remittance growth has coincided with a STRONG peso (2009-2013), while the downside trend has lately been accompanied by a FRAIL peso (2014-2017).
Though it is tempting to make causal deduction or inferences, such correlations must not be construed simplistically. They require a treatise.
Nevertheless, any rationalization predicated on assumed positivity from the weak peso as redounding to so, so & so growth for certain areas would most likely signify bunkum!
More Record Highs: BSP’s Forex Holdings Rockets to Uncharted Zone!
The mainstream has been so obsessed with records highs. Curiously, many economic and financial activities, which set recent milestones, have been ignored.
There has been the RECORD QE, which the BSP has used to finance UNPARALLED budget deficits. UNPRECEDENTED low-interest rates have likewise fueled the HISTORIC corporate and household debt levels. Add to the string of UNCHARTED emergency measures used by the BSP has been the Forex holdings of the Gross International Reserves (GIR) which posted a RECORD-MELTUP in September!
To create the impression of the abundance of international reserves, the BSP has increasingly tapped wholesale financing, e.g. swaps, forwards and repos, which I have been repeatedly noting here
September’s forex holdings, which accounted for the LARGEST monthly infusions, reached the HIGHEST level ever!
The BSP has used a stunning number of forex holdings to offset the remarkable decline in foreign investments!
In percentages, September GIRs have been down by 5.56% the largest since November 2014. While US Treasury data reveals a slight increase in US Treasury holdings by the Philippines last July, year on year % continues to show a contraction.
Although the BSP can tamper with statistics and with market prices for a while, its policy actions will only persist to distort the system and exacerbate the existing imbalances. And the more the imbalance mounts, the greater the risks of a disorderly unwind.
Hope is not a strategy.
