The Philippine Government’s New Method of Controlling Inflation: Censorship of Inflation Reports! Another Sy Led Historic PUMP!

The Philippine Government’s New Method of Controlling Inflation: Censorship of Inflation Reports! Another Sy Led Historic PUMP!

In the National Government’s (NG) attempt to manage the fiscal policy of ‘spend, spend, spend’, I wrote last May: [See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]

5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets.

A principal repercussion of the fiscal policy of spend, spend and spend has been street inflation. The NG’s statistical CPI has also manifested the government-made fiat-money inflation or the effect of the NG’s aggressive spending financed by the BSP and banks on the prices.

As such, desperately looking for a scapegoat, Department of Finance (DoF) officials have trained their guns on establishment economists.

From the Inquirer (December 19, 2018) [bold added]

Finance Secretary Carlos Dominguez III said the government would continue to keep tabs on economists’ inflation and economic growth forecasts next year to make them accountable for their projections which were used as basis for consumer and business decisions.

Dominguez told reporters Monday night that the Department of Finance (DOF) only wanted to compare projections with actual numbers.

 “All I want is the score. [For example, as in basketball] we want to score how many of the three-point shots of Curry go in,” Dominguez said, referring to basketball star Stephen Curry.

While these forecasts have margins of error, Dominguez said analysts and economists should be made accountable when they put their projections out in public.

Early on, DoF officials went into a verbal scrimmage with mainstream analysts.

From the Bloomberg: (December 16, 2018)

The Philippines Department of Finance blamed analysts for "faulty" forecasts that drove up inflation expectations. Now some analysts are fighting back.

The fracas started on Sunday when the finance department issued a statement saying projections by analysts and economists from 13 institutions were “off the mark” by as much as 0.4 percentage points from the official inflation rates for January to November. It suggested the estimates were "weak".

 “These forecasts have also driven inflation expectations that, as we know from global experience, have a tendency tobecome self-fulfilling prophecies,” Finance Undersecretary Karl Kendrick Chua said.

The response was swift. In a country where the central bank uses social media to communicate policy, the financial community isn’t shy about challenging the official view on the same platforms.

Analysts were quick to point out that the government itself has had to revise its own forecasts for inflation, economic growth, and trade.

The next day, mainstream experts gathered forces to scoff at the DOF’s accusations.

From the Business Mirror (December 18, 2018)

LOCAL economists have dismissed the results of the study released by the Department of Finance (DOF) that the “off-the-mark” forecasts of over a dozen analysts actually served to fuel inflation in the past few months, saying it was not right for the government to point fingers at this time.

Yogi Berra once said “It’s tough to make predictions, especially about the future.”

I am reminded of the government of Argentina which has been notorious in the manipulating statistical CPI.

Back in 2011, the Argentine government even “fined two private consultancies $120,000 over the publication of inflation estimates that more than double the official rate”, according to Reuters.

Has the Argentine government been successful in controlling CPI by punishing forecasters?

Argentina’s CPI climbed in 2011 and continued ascent up to the present. Argentina’s information controls or censorship hasn’t thwarted the laws of economics.

Of course, the Philippines isn’t Argentina. But what would matter is of the policies undertaken by the government. Since the Philippines has embraced a socialist path reminiscent of the latter, similarities in outcomes have surfaced.

Or, the Philippines may end up like the latter unless there would be substantial changes in the direction of the present socio-political-economy path. 

So the subjugation of CPI forecast would signify an exercise in futility

And here’s the thing.

The establishment's bickering over the CPI exposes their perspective on inflation: a statistical contraption!

Perhaps such information bears significance for the finance world and the businesses of the elite.

But do street vendors, the sari-sari and carinderia store owners or small and medium business scale enterprises use the GDP and CPI in their business calculations?

Up to what extent have the GDP and CPI been used by entrepreneurs for making decisions?

The DOF gives too much credit to these analysts for their “self-fulfilling prophecies”.

By such allusion, have these analysts attained rock star status? 

According to the BSP’s deposit liabilities, Php 12.152 trillion in total deposits are from 47.54 million depositors who maintain some 59.6 million deposit accounts as of June 2018

With half of the population not having deposit accounts from the banking system, the thrift, and rural and cooperative banks, how (the heck) can these ‘experts’ hold sway on the public’s inflation expectations?

Like Argentina, the DOF is looking for a fall guy for their policy failures.

Yet, of course, the other policy perspective here is control of information. The NG wants to filter out politically unacceptable forecasts. It believes force is necessary to control economic outcomes which play by the book of totalitarianism.

Here is an interesting side note.

Deposits with over Php 2m have grown fastest even when they represent the smallest share of the total accounts. In contrast, growth in the 5k and below accounts, which consists of the biggest share of total accounts, continues to ebb. Such highly skewed distribution of bank deposit liabilities reveals of the dispersion of wealth in favor of the “have’s”.

Finally, it’s hideously naïve for anyone to expect precise outcomes through quantified forecasting in the same manner as predicting natural sciences.

Economics isn’t natural science.

As the great Ludwig von Mises explained,

Economics can predict the effects to be expected from resorting to definite measures of economic policies. It can answer the question whether a definite policy is able to attain the ends aimed at and, if the answer is in the negative, what its real effects will be. But, of course, this prediction can be only "qualitative." It cannot be "quantitative" as there are no constant relations between the factors and effects concerned. The practical value of economics is to be seen in this neatly circumscribed power of predicting the outcome of definite measures.

And of course, economic theory shouldn’t be confused with econometrics. As Economic blogger and Professor Donald J. Boudreaux wrote,

The ultimate test of any theory is not how impressive it looks or even how well its predictions are borne out by the quantitative data.  Rather, the ultimate test of any theory is how well it improves our understanding of reality.  

And one last thing.

The PhiSYx attained a second record today!

That milestone embodies another historic PUMP!

What can’t be attained in the regular session will have to be accomplished by an orchestrated move at the close!

53.3% of today’s gains from an eight-company pump. The Sy group having the largest market cap were the main beneficiaries aside from the stunning JGS push (+5.84% to deliver 87.5% of the 6.67% gains of the day! Awesome!). The 8-firm pump had a total market share of 55.54% as of the day’s close.

Desperate times calls for desperate measures!

And yes, the CPI forecasting censorship is tied with the brazen stock market manipulation: these are designed to control, by force, the laws of economics!

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital.   In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%.  The trend is unmistakable:  the more government has regulated bank capital, the less capital banks have ended up holding—Mark A. Calabria

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Lost in the din of the holiday season and the embellishment of the Philippine financial markets has been the announcement of the Bangko Sentral ng Pilipinas (BSP) to ease capital regulations of the banking system.

From the BSP: (December 13, 2018) [bold added]

The Monetary Board approved the Philippine adoption of the Countercyclical Capital Buffer (CCyB) intended for universal and commercial banks (U/KBs) as well as their subsidiary banks and quasi-banks.

The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital. During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue.

BSP Governor Nestor A. Espenilla Jr. noted that “the CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periodswithin the financial cycle.”

The CCyB is set initially at a buffer of zero percent. This is in line with global practice. It also suggests that the Monetary Board does not see the ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks. The buffer, however, will be continuously reviewed by the BSP. Banks will be given a lead time of 12 months in the event that the CCyB buffer is raised. However, when the buffer is reduced, it takes effect immediately.

Designed to “counter the common occurrence of boom-and-bust periods”, the BSP essentially admitted that “boom-and-bust periods within the financial cycle” exists!

Financial bubbles, even from the BSP perspective, exists!!!

And though the BSP denies “the ongoing build-up of credit as an imminent risk”, it has taken up measures to ease capital buffers by “providing the affected banks with more risk capital”.

Or in times of stress, the BSP’s initial steps to bailout the banking system would be to lower its capital buffer/reserve requirements!

Such resonates with the Financial Stability Coordinating Council’s conclusion in its FSR report…

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner

Pieces of the jigsaw puzzle are falling into place!

And here’s the thing.

No banks would publicly admit that they are undergoing stress. If they do, they become prone to runs.

The CCyB, thus, has been engineered as part of the BSP’s legal framework to conduct the bank bailouts in reticence or away from public scrutiny.

What would affected banks do with the release of more risk capital?

Whether the banks use such capital to do more lending or to conduct financing of its operations, well, the short answer is to provide liquidity to a bank in stress!

Figure 1

Ever since the banking system shifted to put almost all its egg in the loan portfolio, the industry’s most liquid assets continue to drain. In 2018, this phenomenon has only accelerated. [See figure 1]

The BSP’s data on the Banking System’s balance sheet and income statement can be found here and here.

Though the BSP admitted to the “occurrence of boom-and-bust periods”, it doesn’t address the possible sources here of the banking stress, except “build-up of credit”.

Why would there be a disproportionate amount of a “build-up of credit” that raises systemic risks enough for the BSP to launch CCyB?

And given the current operating conditions of the banking system, regulatory relief would translate to even more mounting “build-up of credit” in the face of less capital!

And as further proof that money printing is the only thing central banks know, the BSP ceased increasing or kept policy rates as is this week!

Figure 2

And the result? Yields of long term bonds started to creep higher!

What has been the striking is the stunning collapse in the spread between the 20-year and 6-month, 1- and 2-year notes!

The fixed income markets have been facing considerable stress!

Figure 3

And despite the stunning “compelled” serial orchestrated pushing up of the national equity index and on PSYEi 30 banks, shares of non-PSYEi 30 banks of the Bank index have barely joined the shindig! [Charts: Why the Janus-Faced Banking Stocks? PSEi Banks Versus The Rest November 26, 2018]

The question is why?

Outside mainstream ken, this would be the second major bailout by authorities channeled through the easing of the regulatory regime. In this 2nd case, again, banks would be allowed to ABSORB more risks than necessary by scaling down its capital reserves.

Again, why?

Great “boom” stuff, no?

The first regulatory bailout/relief was implemented by the Insurance Commission on Pre-Need Firms [See Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, The Twin of Unbridled Fiscal Spending is High Inflation, The Coming StagflationNovember 18, 2018]

Figure 4

The reasons behind such regulatory bailout/relief reinforced by the 3Q performance of Non-Bank Quasi Banks (NBQB)

-Continuing Profit Drought (published Net income after taxes: -10.8% 3Q, -11% 2Q and -6.6% 1Q)

-Persisting Liquidity Drain (published cash and due banks: +.6% 3Q, -.8% 2Q and -1.6%) and

-Rising Distressed assets (21.3% 3Q, 20.7% 2Q and 21.2% 1Q)

Distressed assets are defined as NPLs plus ROPOA (Real and Other Properties Owned and Acquired), gross and restructured loans, current

Pls find the BSP’s Non-Banking Quasi Banks (NSQB) balance sheet and income statement here and here

These measures do little but to postpone and aggravate systemic maladjustments.