In this issue:
Defying Mainstream Optimism: Nissan Motor Phil., and Makati Shangri-La to Shut Operations! PSE’s Historic Speculative Mania!
I. Strong Economic Recovery? Tax Something, Get Less of It: The Nissan Philippines Closure
II. Strong Economic Recovery? The Boracay Blueprint: Makati Shangri-La’s Hiatus
III. Beyond Nissan and Shangri-La: Escalating Signs of Capital Decumulation
IV. Rising Stagflation Risks: Solving Economic Problems with More Politics!
V. Intensifying Financial Instability in Motion: PSE’s Historic Speculative Mania!
Defying Mainstream Optimism: Nissan Motor Phil., and Makati Shangri-La to Shut Operations! PSE’s Historic Speculative Mania!
Didn’t these two iconic companies, Nissan Motor Philippines and the Shangri-La Group, get the memo that a strong rebound is due this 2021?
I. Strong Economic Recovery? Tax Something, Get Less of It: The Nissan Philippines Closure
From Philstar (January 21): Nissan Motor Philippines became the third car manufacturer in 3 years to halt assembly in the Philippines, highlighting the struggles of the broader automobile industry that government has been trying to revive for years. In terms of car supply, Nissan’s departure would only stop production of its Almera model, which by government estimates was only able to sell an average of 4,500 units at home every year. That, the trade agency said, represented only 1% of total car market and would instead be imported from Japan and Thailand going forward. Majority of the company's sales come from imported pick-ups and sport utility vehicles (SUVs). But the shutdown also meant 133 additional Filipinos getting left jobless at the start of the year. The labor department is said to extend assistance to them, while Nissan would continue to operate marketing and distribution offices in the Philippines. That said, Nissan closing its manufacturing shop underscored the automobile sector’s failing efforts to attract assemblers in the Philippines. While car sales have posted vibrant growth over the past 5 years prior to the pandemic that crashed demand, most cars sold are imported, accounting for 68% of the market in 2015. The trade department said this had since increased to around 70% currently…On the ground, that meant more car assemblers closing shop. In 2019, Isuzu, another Japanese automaker, stopped producing its D-Max model onshore. The following year, just before the pandemic peaked, Honda Motor Co. Ltd. likewise left the country due to “low production volume.” In fact, Lopez revealed Nissan would have joined Honda in leaving earlier last year, but that the former, while contemplating their exit at the time, delayed a decision on the matter. “They have in effect extended their stay,” the agency said. The exodus of car manufacturers are continuing despite a prevailing state-led program that offers incentives to foreign assemblers. The Comprehensive Automotive Resurgence Strategy or CARS program, which started in 2015, provided for fiscal support to car firms that would establish local factories.
Nota Bene: Bold highlights to all news excerpts are mine.
For starters, the latest announcement involving the coming closure of Nissan's assembly plant represents the third car manufacturer since 2019. Nissan was supposed to follow Isuzu and Honda in 2019 but delayed their decision, perhaps to give the prospects of recovery of the industry (and economy) the benefit of the doubt.
The pandemic, in short, hardly had been a factor for Nissan's decision to pull out.
And unfortunately, imports became a politically convenient scapegoat. Sales of imported vehicles collapsed likewise collapsed in 2020.
Figure1
From the Businessworld (January 15): CAR SALES slumped in 2020, after a holiday demand spike failed to make up for the plunge in demand during the coronavirus-induced lockdown, data from two automotive industry groups showed. Data from the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) and Truck Manufacturers Association (TMA) released on Thursday showed full-year sales stood at 223,793 units, 39.5% lower than the 369,941 sales in 2019. Imported vehicle sales declined 41% to 51,719 units in 2020, the Association of Vehicle Importers and Distributors, Inc. (AVID) said in a separate report.
So what factors have prompted car manufacturers to opt for a sudden pullout?
The most likely answers are:
First, a downtrend in auto sales.
Second, rising trend of vehicle NPLs.
Third, political interventions affecting sales and output.
Fourth, the lethal effect from the combination of the above.
Authorities seem to have forgotten economics 101: the law of demand or Tax Something, Get Less of It.
Car sales growth climaxed in 2016 and turned down since.
The TRAIN tax reform, implemented in 2018 that raised the industry's excise taxes substantially, accelerated the plunging sales trend. The industry saw this coming.
Imports and locally manufactured vehicles faced a third competitor, used car sales. That is, used car sales from the upsurge in NPLs must have reduced the market shares of new cars, which lead to 'low production volumes'.
Such back-to-back blows must have incited Isuzu and Honda to withdraw operations in 2019.
For Nissan, the pandemic represented the proverbial nail in the coffin.
So what has the National Government done to address this? Well, sad to say, push for more taxes.
From Philstar (January 5, 2020): Fresh from the pounding from coronavirus pandemic last year, automakers are warning this year may not be any better, no thanks to a government order to slap tariffs on imported cars. That decision, the Chamber of Automotive Manufacturers of the Philippines (CAMPI) said, is likely to trigger further sales losses, which in turn, could prompt carmakers to lay off jobs… While CAMPI groups companies that assemble cars in the Philippines, the industry group’s members have for years been more inclined to ship in completely assembled units from offshore due to cheaper costs. Across the sector, the share of imported vehicles rose from just 40% in 2006 to about 70% in 2018, trade department data showed…The Department of Trade and Industry acted on a petition by the Philippine Metalworkers Alliance, a labor group composed of roughly 13,000 unionized members, which said that the duties will help local vehicle assemblers recoup losses from cheaper import competitors. But Gutierrez warned the tariff would not bring customers to buy locally made vehicles and instead trigger a shift to second-hand vehicles, hurting the automotive sector as a whole. “With much uncertainty, investments in dealer expansion and parts localization may be deferred,” he added.
If imports posed as the problem, local manufacturers would have cheered such a protectionist approach from the authorities. But instead, they decried it.
Cui bono?
By protecting the interests of the labor union, the closure of Nissan sent 133 of its employees packing into the pool of millions of unemployed. And more job losses are in the offing, should the adverse effects of the protectionist tariffs become a reality.
Of course, the auto/vehicle industry has networks attached to it. And so, what of the enterprises and workers supporting the supply and demand networks of Nissan’s operations and its workers?
And that’s not all.
Vehicle NPLs are a product of the BSP's zero-bound or artificially low-interest rates regime. That is, while low rates boosted sales in the past, by increasing the leverage of vehicle buyers’ balance sheets and unduly diverting resources to the industry, a slowdown of the industry and or the economy would only magnify credit issues that reinforce its slowdown.
Thus, reduced jobs and income will likely lead to a surge in delinquent loans, and subsequently, an upsurge in repossessions of vehicles that should bloat supply.
For this reason, the 2Q lockdown accelerated/spiked the uptrend of vehicle NPLs since 2015.
Prices of repossessed and second-hand vehicles can be expected to plunge, affecting sales, and eventually, selling prices too, of locally produced or imported new cars.
Consequently, falling prices and diminished margins brought about by declining sales should also reverberate to lower production output and or imports.
So what has the reopening and vaccine got to do with the industry’s structural dilemma?
II. Strong Economic Recovery? The Boracay Blueprint: Makati Shangri-La’s Hiatus
Well, it’s not just the auto industry.
Figure 2
From the Businessworld (January 21): MAKATI SHANGRI-LA Hotel will be temporarily closing down operations starting next month as it yields to financial pressures caused by the lockdown. The Shangri-La Group said in a statement on Wednesday that the company will be reorganizing its Philippine workforce and operations. It did not announce the length of the closure. The luxury hotel operating in Makati City for almost three decades will be letting go of an unspecified number of employees, and will be offering compensation, healthcare coverage, and grocery support to former employees until the end of the year. Shangri-La said that the closure decision was made after low business levels and a prolonged recovery timeline. Hotels for much of the stricter lockdown declared in March last year to manage the public health crisis were not allowed to operate at full capacity.
Makati Shangri-La is one of the 15 privileged hotels recently granted by authorities to accommodate staycations or domestic tourism. Yet, the firm decided to forego the opportunity.
The decision of Shangri-La Group to cease operations reflects on the industry's woes.
Consider this, while hotels have been mushrooming in the metropolis alright, according to the National Government’s statistics, the value-added component of the industry to the economy has been diminishing. Since peaking in the 2Q of 2016, the hotel industry’s GDP has been southbound.
As an aside, 4Q 2020 GDP will be announced this week.
Why?
Politics have played a substantial role here.
Economic distortions arose from the closure and redevelopment of Boracay in 2018 and many other resorts nationwide that constituted part of the overall campaign to protect the environment.
And even as the tourism industry continued to supposedly grab a bigger share of the national GDP pie, hitting 12.7% in 2018, the hotel industry’s divergent path may be symptomatic of the emergent signs of a supply glut.
The banking system’s loan portfolio to the industry supports the sectoral GDP data. The growth of bank loans hit an acme in December 2014 and cascaded since.
That is, the hotel industry has been plagued by developing imbalances even before the pandemic.
Must we assume that arbitrary interventions would only produce benefits?
In the name of preserving the environment, what were the unseen consequences of Boracay’s closing to the public, as well as the assault on other resorts nationwide?
For instance, to what extent have banking loans soured from this? What have been the effects on the industry’s supply chain of networks at present? To what degree of the demand has been impaired? Have these been contributing to the slowing pre-2020 GDP?
As events have turned out, Boracay proved to be a harbinger and a blueprint of a bigger event: the lockdown socialism of 2020.
That is, in response to COVID-19, the mobility restrictions imposed by authorities only exacerbated the hotel/accommodation industry’s dilemma.
And with the Shangri-La Group’s finances hemorrhaging from today's Boracay writ-large event, which has been compounded by the industry’s slowing productivity trend, ergo, the management’s directive to conserve resources by temporarily shutting down operations. The group's other hotels remain operational.
See? Shangri-La’s recourse to preserve resources or shore up savings represents a natural and healthy reaction for a recovery.
With uncertainty ahead, why should the Shangri-La Group gamble by increasing leverage on its balance sheet that should magnify their financial risks?
To appease the mainstream and the politicians at the expense of their survival?
In any case, Nissan and Makati Shangri-La’s decision to suspend operations represents a demonstrated preference—actions speak louder than words—in sharp contrast to the mainstream’s near-unanimous verdict that the economy is poised for a vigorous rebound in 2021, which serve as a convenient rationalization for the historic stock market bubble, anchored on the naïve or simplistic view that “the market is forward-looking” while discounting or ignoring the contorting effects of the central bank record interventions and direct manipulation of the equity index.
III. Beyond Nissan and Shangri-La: Escalating Signs of Capital Decumulation
And as icons of their respective industry, the unfortunate plight of Nissan and Makati Shangri-La had to be reported by mainstream media reluctantly. Yet, the news coverage carried little context, particularly on the causal factors behind these.
Since Nissan and Makati Shangri-La represent the upper hierarchy (or top of the chain) of the nation’s commercial-production network, one may suspect that their challenges are likely worse for those on the lower echelons.
Or, how about the financial and economic conditions of the unheralded mom and pop or small and medium enterprises?
In the assumption that the numbers in this report are accurate, here’s a clue from the Inquirer (January 22): Mass layoffs worsened in the last quarter of 2020 and millions of workers continue to suffer from no pay or reduced pay a year since COVID-19 broke out, according to the Department of Labor and Employment (Dole). Nearly half of the total 428,701 job losses reported to the Dole last year occurred from October to December, according to its 2020 job displacement report released and presented to its senior officials this week. The report said a total 26,060 micro, small, medium and large businesses closed permanently or retrenched some of their workers. The report also showed that from start of the lockdown in March until December last year, at least 4,577,027 workers in 161,251 establishments were trapped in a “no work, no pay” situation due to the prolonged temporary business closure or reduced working hours.
How will these human capital casualties (entrepreneurs and workers) of the lockdown socialism recover?
And what relevance are those myriads of surveys, indicating for better prospects ahead, with factual losses? Or had the series of surveys been part of the grand scheme of the informational campaign designed by the nomenklatura to provide assurances to the public?
And by boosting the public’s animal spirits or confidence, perhaps intended to offset these gloomy developments, business registrations are exploding, so claim the authorities.
From the Inquirer (January 21): More than 916,000 enterprises registered and renewed their business names under the Department of Trade and Industry (DTI) last year, driven mostly by pandemic-weary entrepreneurs who wanted to start their own mom-and-pop stores or sell products online. According to the DTI’s Business Name Registration (BNR) Division, total registrations last year reached 916,163, of which 91 percent were considered new while the rest were renewals. This is nearly 44-percent higher than the total registration in 2019 at 637,567…“Amid the pandemic, there are still many opportunities that we can find and discover. In fact, during the pandemic, [the number of] newly registered businesses [went up to 916,163 as of December]. That’s the highest growth rate since 2010,” Lopez said. A newly registered business name, however, does not automatically mean the enterprise is already operational. They still need to get a business permit in order to start their operations. The DTI BNR said they do not have any data on how many of these already started operations. Nevertheless, DTI BNR data suggested that many entrepreneurs turned to retail—either online or brick-and-mortar stores—to make ends meet last year as the pandemic dragged the country to its worst recession in decades. Of the total, 140,371 business names were for sari-sari stores while 88,574 names for online stores.
There is a difference between new companies forged out of substitution (from business closures and unemployment) and expansions. Nonetheless, the DTI head admits that “many entrepreneurs turned to retail...to make ends meet last year”.
As raised in my September outlook,
First, because of, or under the guise of COVID-19, the NG restricted physical movements, which led to a surge in business closures and employment losses. In doing so, for economic survival, commerce has abruptly shifted to the digital space.
COVID-19 Cases May Have Peaked! Health Officials Admit that Lockdowns Don’t Work, Jobless People: 4.6 Million or 27.3 Million? September 6, 2020
To be sure, the current gains in business registrations represent the impulse for survival.
In turn, considering the extent of restrictions on social mobility and business operations aside from the existing imbalances before the pandemic, and more importantly, the distortions from the present interventions and bailout measures that have skewed the economic benefits toward the elites, the SMEs are most likely to suffer HIGHER mortality rates than its historical averages.
The present environment has been conducive to empowering of monopolies or cartels.
Next, despite the supposed reopening, economic fragility has only been magnified.
That is, the shock from the forced shutdown of the economy, which has exacerbated the impact of the pre-existing economic maladjustments, only intensified the scale of capital destruction as exhibited by the continuing business closures, income, wage, and job losses, the depletion of cash reserves, the surge of credit delinquencies, and increases in idled factors of production.
And yet, the sustained disruptions in the supply networks, and its ensuing damage to demand, widening fiscal deficits, the increasingly stringent regulatory regime that smothers businesses, and once again political measures to suspend the market clearing process through the massive series of monetary and fiscal rescue measures have spurred surging public debt (which translates to higher taxes most likely after elections), rising street prices or inflation, and burgeoning social, political and economic inequality.
Strong Economic Recovery? Mobility Trends in 1H January Still Sharply Down, PSE’s Incredible Small Cap Bubbles! January 17, 2021
Given the current trend of capital decumulation, where will the capital come from to finance economic development?
IV. Rising Stagflation Risks: Solving Economic Problems with More Politics!
And the escalating ambiance of stagflation should help boost the economic health of the people?
And what are the proposed policies to arrest street inflation?
From the Inquirer (January 24) The runaway prices of key food items in the market have prompted local and national agencies to call on President Duterte to implement a price freeze on pork, chicken and vegetables. Following a virtual meeting, officials of the Departments of Agriculture and Trade and Industry, the Metropolitan Manila Development Authority, and chief executives in Metro Manila have agreed to recommend to the President to impose a price freeze on items like pork, chicken, fish and vegetables.
So, will the authorities further exacerbate food supply-demand imbalances?
Figure 3
Nevertheless, it was a pleasant surprise to see a few netizens pushback on such propositions. More of this is needed.
And as expected, more pork imports will be allowed by authorities, while the Department of Agriculture will allocate public funds worth Php 10 million to augment the pork supply.
And reminiscent of the garlic investigations at the Senate hearing in 2017, a proposal has been made to conduct a probe on rising food prices at the Senate.
Here’s more. Another proposal is to increase minimum wages at a time when companies are losing money and shedding labor!
Needless to say, the popular solution to the problem of economic allocation is to indulge in MORE POLITICS!
Awesome!
Here is the thing. Bank cash reserve growth appears to have rolled over in November even as the BSP’s assets zoomed.
Interestingly, the growth rate of cash in circulation has materially slowed coincident with a plateauing savings rate. Have increases in savings deposits climaxed? Are the people beginning to drawdown on savings at the margin?
Put this way, the current state of financial liquidity appears to be eroding fast even as the BSP has been engaged in massive asset expansion. The BSP’s response has been to extend its asset purchase program in early January 2021.
Monetary data suggests that the present liquidity drain is due to surging credit delinquencies, supported by frail demand. Typically, such an environment should imply lower street prices or statistical inflation. But supply bottleneck issues and the continued expansion of the BSP’s balance sheets to counter such deflationary dynamic represent a clear and present danger.
That is, in contrast to the mainstream’s predictions, a pick-up in bank credit transactions will translate to a “be careful of what you wish for” moment. That’s because an improvement in demand thru bank credit transactions in the face of supply gridlocks will easily conflagrate street prices.
The bigger the economic misallocations, the greater the risks of a financial crisis.
V. Intensifying Financial Instability in Motion: PSE’s Historic Speculative Mania!
Figure 4
As mentioned earlier, global stock markets are at a moonshot as the world central bank injects unprecedented amounts of liquidity into the financial system.
In the US, even the share prices of unprofitable tech firms have been bid to the high heavens!
Echoing world developments, the Philippine Stock Exchange has been gripped by a historic speculative mania as the BSP injected a record Php 2 trillion into the financial system as of November 2020.
And while the index drifts only at the 7,000 level, many second and third-tier issues have commanded the market participant’s attention as exhibited by vertical price uptrends.
And because some have even infiltrated the top 10 to 20 most traded issues, daily trades reached another ALL-TIME HIGH despite the week’s 2.66% correction. The average weekly number of Traded Issues remains at a hairline from the December 29 record highs.
Figure 5
The main-board volume has traded close to November 27th, 2020 milepost, the second-highest weekly volume after September 2014.
Because foreign trades have dropped to multi-year lows, it is obvious that with a small retail population, local financial institutions, the likely beneficiaries of the BSP’s injections, have dominated trading activities, perhaps, intended to replace lost income from stagnating core lending activities.
There is little appreciation that what has been happening today represents one for the history books!
Neither is the unprecedented scale of volatility a sign of prices signifying cash flow discounting mechanism nor a price discovery on economic growth. Instead, it is an indicator of late-cycle terminal phase volatility. Or intensifying signs of financial instability in motion!
Be careful out there!
