The Philippine Political Economy: January 2023’s Rare Fiscal Surplus; The Fiscal Inflation

  

I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale―Thomas Jefferson 

 

In this issue 

 

The Philippine Political Economy: January 2023’s Rare Fiscal Surplus; The Fiscal Inflation 

I. Reason for Surplus: After a Fiery December, Public Spending Plummet in January 2023! 

II. Revenue Growth Powered by Inflationary Policies 

III. What a Slowdown in Public Spending Entails 

IV. January Surplus: Public Debt Swelled to a New Record! 

V. The Fiscal Inflation 

 

January's fiscal surplus emerged from an idiosyncratic dive in public spending. With a buildup in public debt and bank credit climaxing, deficit spending may be about to mount a fiery comeback.

The Philippine Political Economy: January 2023’s Rare Fiscal Surplus; The Fiscal Inflation 

Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon," which we agree with.  Hence, statistical inflation represents a consequence of bank and central bank credit and monetary expansion.  

 

With bank credit appearing to have peaked, deficit spending financed by monetary expansion represents the other principal source of inflation. 

 

A terse inquiry on January's rare surplus is the topic for this outlook.  

Businessworld, March 17: The National Government’s (NG) budget balance swung to a surplus in January as revenue growth outpaced state spending. The Philippines’ budget recorded a surplus of P45.75 billion, a turnaround from the P23.38 billion deficit a year earlier, the Bureau of the Treasury (BTr) reported on Friday. The last time the government recorded a budget surplus was in April 2022, with P4.94 billion. “This favorable outcome was a result of revenues outgrowing government spending: revenues grew by 25.2% while spending rose by 0.3%,” Finance Secretary Benjamin E. Diokno said in a Viber message to reporters.  

When seen from a peso-based figure, the story presented by the media looks somewhat different. 

 

I. Reason for Surplus: After a Fiery December, Public Spending Plummet in January 2023! 

 

Figure 1 

 

Why? Public spending, which spiked last December, collapsed in January! (Figure 1, topmost chart) 

 

Public spending rocketed by 42% (Month-on-month) last December, only to plummet by 53.2% this January!  It signified the largest-ever MoM plunge. (Figure 1, middle pane) 

 

In YoY change, this decline was across the board for all expenditures. 

 

In pesos, authorities gave up all the gains last December and more. 

 

As it turned out, the slump in January signified a response to the record amount spent last December. 

 

II. Revenue Growth Powered by Inflationary Policies 

 

In contrast, peso revenues swelled to the second-highest level ever. 

 

Helped by non-tax revenues, total revenues jumped 25.1% YoY or 29.8% MoM last January.   

 

Non-tax revenues vaulted by 90.3% YoY, which increased its share to 12.2% from 5.3% in December.  Still, BIR and the Bureau of Customs expanded by 20% YoY and 21% YoY.  

 

So, the effects of the escalation of the bank credit boom filtered into revenues.  

 

Bank lending and public revenue growth have coincided since 2021.  Bank lending powered the GDP hence the increase in tax intake. (Figure 1, lowest chart) 

 

 

Figure 2 

 

And inflation, as represented by the CPI, had a crucial role in boosting public revenues.  Higher selling prices bolstered the topline of corporations, which amplified revenue growth.  (Figure 2, topmost chart) 

Also, the companies that built inventories earlier benefited from rising prices through higher profit margins, thereby boosting the bottom line, which helped in the public revenue collections growth. 

 

Authorities have also benefited from financial repression through negative "real" rates.  With inflation higher than interest rates, it stripped or corroded the debt levels of major borrowers, primarily the government. This effectively transfers resources invisibly from the public to the government. (Figure 2, middle window) 

 

III. What a Slowdown in Public Spending Entails 

 

Although a month does not a trend make, if authorities cut back on public spending in the following months, it will negatively impact the GDP.   

 

In 2022, public spending and fiscal deficit, which have been adrift at record levels, accounted for 23.4% and 7.33% of the NGDP, respectively. (Figure 2, lowest pane) 

 

The rising share of public spending to the GDP demonstrates the increased use by the government of economic and financial resources at the expense of the public.  And this represents the direct expenditures only.  

 

But the private sector has also allocated resources to political projects via PPPs, subcontract work, and supply and services provisions, which means public spending numbers are broadly understated. 

 

And, of course, because public spending plays a considerable role in influencing the CPI, its retreat translates to a temporary softening of price pressures.   

 

On the other hand, given the path dependency on free lunches, we expect authorities to resume their bold spending plans to promote popularity ratings for the upcoming elections. 

 

IV. January Surplus: Public Debt Swelled to a New Record! 

 

Figure 3 

Fiscal surpluses in a world of free lunches are uncommon.  There have been only three incidences—twice in 2020 (January and June) and once in 2022 (April)—since January 2020.   

Yet, deficits swelled to (near) record levels at the end of the year.  

 

Oddly, even when the Bureau of Treasury (BTR) reported a surplus in January, the Treasury raised a substantial Php 366 billion, which increased its cash holdings to Php 591 billion. (Figure 3, topmost pane) 

 

As a result, public debt surged to a new milestone, Php 13.7 trillion, as of January 2023—and counting. (Figure 3, middle window) 

 

Distributed by (PSA 2020 survey) population and by household, the landmark public debt translates to Php 125,633 per person or Php 519,000 per household. 

 

And rising debt levels, exacerbated by rising rates, have become evident in Treasury's interest rate budget allotment. (Figure 3, lowest chart) 

 

Authorities seem to be preparing to increase expenditures over the coming months, hence the increase in public financing. 

 

V. The Fiscal Inflation 

 

But debt hasn't been the only instrument used to finance deficit spending. 

  

 

Figure 4 

 

The banking system and the BSP have jointly financed the record deficit via Net claims on the central government (NCoG). (Figure 4, top and middle charts) 

 

While the BSP's NCoG has spiked and plunged alongside spending in the last two months, the banks pulled back slightly in January, that is, after having carved a new landmark in December. 

 

Nevertheless, the central bank NCoG has been instrumental in determining changes in the BSP's assets. (Figure 4, lowest graph) 

 

Here is the thing.  If indeed banking loans recede from their current growth rate and levels, authorities would most likely reaccelerate the use of fiscal tools (expand deficit spending) to prop the GDP.   

 

That said, after a slowdown in the CPI, a resurgent deficit spending will likely fuel the third wave of inflation. 

 

Free lunches ultimately end when authorities run out of money. 

But that would come only after exhausting other means of access to money, such as imposing onerous direct and indirect taxes on its constituency and the reduced availability of credit. 

Jollibee’s Q4 2022 Net Income Plunged on High Rates Amidst High Debt Levels; BSP Rate Hikes Start to Bite! JFC’s Bet on Global Consumers

Jollibee’s Q4 2022 Net Income Plunged on High Rates Amidst High Debt Levels; BSP Rate Hikes Start to Bite! JFC’s Bet on Global Consumers 

Jollibee Food Corporation's 2022 figures look remarkable.  But beneath the headlines, it shows how rising rates have gnawed at the bottom line while JFC's global thrust increases many internal risks. 

 

Businessworld, March 17: In its disclosure to the stock exchange, JFC said its 2022 revenues grew by 38% to P211.9 billion from the P153.58 billion it saw in 2021. System wide-sales, which measures all sales to consumers, rose by 40.2% to P296.82 billion the P211.72 billion previously. The company’s net sales increased by 37.9% to P196.66 billion from P142.59 billion in the previous year. The company’s expenses also increased by 36.7% to P27.01 billion from P19.8 billion in the previous year. For the fourth quarter of 2022, attributable net income plummeted by 90.3% to P320 million from P3.28 billion in the same quarter in 2021. The company also reported a 99% fall in net income to P31 million from the P3.25 billion previously recorded. The lower profit came despite a 38.5% increase in system-wide sales to P85.94 billion from P62.03 billion previously. Revenues increased by 36.8% to P61.55 billion from P45 billion, while EBITDA grew by 3% to P8.21 billion from P7.97 billion. 

 

Inflation and Base Effects Powered JFC’s Topline Boom! 

 

Big annual numbers for Jollibee Food Corporation [PSE: JFC] in 2022. 

 

But the devil lies in the details. 

Figure 1 

 

Thanks to international sales and inflation, 2022 was a breakthrough for nominal Peso and YoY % sales. (Figure 1, topmost window) 

 

Why attribute JFC's financial performance to inflation? 

 

Because the boost in JFC topline performance came from debt expansion, BSP's record liquidity injections and money supply-funded election spending—mostly alluded to reopening. (Figure 1 middle chart) 

 

That's not all.   

 

Profit margins have benefited JFC immensely during the inflationary period of 2015-2017 and 2021 to 2022.  But the 2022 margins run short of the 2016 and 2017 highs. (Figure 1, lowest pane) 

 

High Debt Levels: Interest Rate Hikes Bite on JFC’s Bottom Line! 

 

And there's more.  

Figure 2 

 

The deficit from interest rate expenses boomed in 2022.   The recent surge in debt and higher BSP rates signified a drag on nominal net income, which despite the splendid %, remained marginally off from the 2018 and 2019 levels. (Figure 2) 

Figure 3 

 

It was in Q4 2022 when interest rate expenditures swelled to a record, which likely was pushed by the BSP's panic rate hikes along with the US Federal Reserve.  (Figure 3, upper chart) 

 

As such, Q4 net income plummeted to Php 30.8 million—a Q1 2020 low! (Figure 3, lower chart) 

 

Despite the big numbers, rising rates and high debt levels have started to gnaw at JFC's bottom line. 

 

So, up to a certain extent, elite companies benefit from inflation, but when rates start to rise, it masticates on the bottom line because of the scale of debt.  

 

Jollibee: An Enormous Bet on Global Consumers 

 

Yet, a bet on Jollibee is a bet on global consumers. 

Figure 4  

 

In Q4, JFC domestic sales marginally topped the Q4 2019 high (up by 7.8%).  Again, monetary and street inflation contributed substantially to the gains. (Figure 4) 

 

Meanwhile, international sales catapulted by 40.8% over the same period.  

 

JFC has been backing up its truck in the international arena.  

 

Though sales remain tilted toward the domestic market, its contribution to the overall has been a downtrend.   It was 62.09% in 2022, its third year of 60%+ share.   

 

Assets and Capex have been lopsided towards international exposure. (Figure 4) 

 

Global assets accounted for 62.9% in 2022, while Capex represented 64%.

At any rate, the cost of leveraging for aggressive expansion may have come home to roost.   A global recession may not be kind to JFC.