Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE?

 

Every Ponzi is sold as a non-zero sum store of value. Every Ponzi investor believes the investment is a non-zero sum store of value—Nassim Nicolas Taleb

Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? 

San Miguel’s Q3 and nine-month sales performance validated the signs of a weakening economy. However, while the company reduced its debt from Php 1.484 trillion to Php 1.477 trillion, its practices exhibit symptoms of Minsky’s Ponzi finance.

I. San Miguel’s Slowing Sales Resonated with the Economy 

San Miguel’s 9-month sales performance demonstrates the weakening of the Philippine economy which was not limited to consumers.  

Given the current loose economic conditions, supported by the first BSP rate cut and the "Marcos-nomics" stimulus, it is surprising to see a contraction in cement and real estate revenues, as well as a downturn in infrastructure sales growth. For a company that has shifted its business model to rely heavily on political projects or enterprises, this downturn should be a cause for concern. 

Additionally, the consumer spending slowdown was pronounced in the context of declining food and packaging sales—which eked out marginal growth. 

SMC reported a Q3 revenue increase of only 3.9%—which would be flat once adjusted for inflation! 

Q3 sales pulled down the 9-month revenue growth, which clocked in at 11.2%.

In any case, despite a slight drop in margins, SMC reported income growth of 18.9%, amounting to Php 37.1 billion.

Despite this income growth, SMC’s outstanding debt fell only by Php 7.43 billion to Php 1.477 trillion from its 1H historic high of Php 1.485 trillion. 

II. San Miguel’s Incredible Short-term Debt Recycling, Deeper Signs of Ponzi Financing? 

However, this situation appears to be a result of smoke and mirrors, as the heavily leveraged holding firm raised approximately Php 71.4 billion through various preferred share issuances by its subsidiaries to bridge its financing gap. 

The issuance of preferred shares has potential impacts on common shareholders. Preferred shares typically have priority over common shares in receiving dividends and claims to assets. As a result, common shareholders may see reduced dividends, as preferred shareholders must be paid first. In the event of liquidation, preferred shareholders also have a higher claim on assets. 

A closer look at their cash flow statement reveals a striking example of debt recycling, reminiscent of Hyman Minsky’s "Ponzi finance." 

SMC borrowed an additional Php 110 billion in short-term debt, bringing the total to Php 933.794 billion, to pay off a rising Php 898.657 billion in loans. 

Professor Minsky described this as "Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts" (Hyman Minsky, 1992) 

Incredible! 

SMC’s Q3 interest payments rose by 10% to Php 25.05 billion, marking its second-highest level.

Although SMC reported a 6% increase in cash, amounting to Php 15.9 billion and totaling Php 281.2 billion, this figure remains significantly lower than its short-term liabilities of Php 383 billion, which raises the firm’s liquidity risks. 

III. Is SMC’s Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? 

To put this in perspective, SMC’s 9-month 2024 Php 1.477 trillion debt is equivalent to 6.6% of the estimated 2024 GDP and 4.5% of total financial resources (Q3). 

It is a telltale sign of the expanding concentration risk in the economy, or the 'too big to fail' phenomenon. What could go wrong? 

Its opportunity costs translate into either productive lending to the broader economy or financing competitiveness among SMEs. 

This also means that even at zero interest rates, the mounting scale of Ponzi finance or debt recycling is virtually unsustainable. 

It would likewise be a blatant mistake to assume that "what happens in SMC stays in SMC." 

As a counterparty to lenders, a liquidity crunch or potential insolvency won’t just affect the health of the banking system, the fixed-income market, or, indirectly, the Treasury markets—it could have broader economic and political repercussions. 

A liquidity squeeze could affect both direct and indirect industry and consumer linkages to SMC’s businesses.

Moreover, a political decision to bail out SMC would likely fuel inflation, which would come at the expense of the Philippine peso.

Sadly, could SMC represent the proverbial "Damocles' Sword" hanging over the Philippine economy, the financial system, and the Philippine Stock Exchange?

Interestingly, SMC share prices appear to have recently behaved like a pegged currency, with entity/ies defending the lower band (price floor) during the 5-minute pre-close period for several days, maintaining the Php 88 level (as of November 29) Previously, the lower band was at around Php 88.7.

___

reference  

Hyman P. Minsky The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College May 1992

 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

 

Deficits are always a spending problem, because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increased every year—Daniel Lacalle

In this issue

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect?

V. Record 10-Month Expenditure: The Push for "Big Government"

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

VII. Rising Foreign Denominated Debt Payments!

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

IX. Q3 2024: Public Debt to GDP rises to 61.3%

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status 

Improvements in the 10-month fiscal balance have fueled the Philippine government’s unrealistic fixation on achieving 'Upper Middle Income' status—here's why. 

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints 

Inquirer.net, November 28: A double-digit revenue growth helped swing the government’s budget position back to a surplus in October, keeping the 10-month fiscal deficit below the 2024 ceiling set by the Marcos administration. The government ran a budget surplus of P6.3 billion in October, a reversal from the P34.4- billion deficit recorded a year ago, figures from the latest cash operations report of the Bureau of the Treasury (BTr) showed. 

Most media outlets barely mention that recent changes in tax collection schedules have distorted the Bureau of the Treasury’s reporting data. 

As noted in September, these adjustments significantly impact the perception of fiscal performance. 

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. 

Therefore, we should anticipate either a surplus or a narrower deficit this October. (Prudent Investor, October 2024)

Figure 1 

For instance, October’s surplus of Php 6.34 billion underscores how the quarterly revenue cycle boosts collections at the start of every quarter, often leading to either a surplus or a narrowed deficit. Surpluses were observed in January, April, and October this year. (Figure 1, topmost chart) 

However, as the government pushes to meet its year-end 'budget execution' targets in December, a significant spike in the year-end deficit could emerge from the remaining spending balance. 

Based on the budget allocation for 2024 amounting to Php 5.768 trillion, the unspent difference from the ten-month spending of Php 4.73 trillion is Php 1.038 trillion. 

Notably, in contrast to previous years, 2024 has already experienced three months of public spending exceeding Php 500 billion, with December still underway. (Figure 1, middle image) 

On the other hand, this could indicate a potential frontloading of funds to meet year-end targets. 

While spending excesses are constrained by law, the government has consistently exceeded enacted budget allocations since 2019. (Figure 1, lowest diagram) 

Consequently, this trend, shaped by political path dependency, suggests that the remaining Php 1.038 trillion could likely be surpassed. 

According to the Department of Budget and Management (DBM), budget adjustments are permissible under specific conditions: (DBM, 2012) 

1.    Enactment of new laws,

2.    Adjustments to macroeconomic parameters, and

3.    Changes in resource availability. 

These provisions may provide political rationales to justify increases in the allocated budget.

Figure 2

Expenditures, while down from last month, remain within their growth trajectory, while revenues have so far outperformed expectations. (Figure 2, topmost graph)

Despite October’s 22.6% revenue growth contributing to a lower ten-month deficit—down from Php 1.018 trillion in 2023 to Php 963.9 billion—it remains the fourth largest on record.

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

What is seldom mentioned by mainstream media is that such deficits serve as "fiscal or automatic stabilizers," ostensibly for contingent or emergency (recession) purposes.

While authorities repeatedly propagate their intent to elevate the economy to "upper middle-income" status and attain a credit "A" rating soon, they fail to disclose that current political-economic conditions are still functioning under or reflect continued reliance on a "stimulus" framework.

In fact, as we keep pointing out, the Bangko Sentral ng Pilipinas (BSP)’s reserve requirement ratio (RRR) and interest rate cuts represent monetary measures, while authorities have ramped up fiscal measures or "Marcos-nomics stimulus" for their political agenda—namely, pre-election spending and a subtle shift toward a war economy, alongside centralization through increased public spending and an enlarged bureaucracy or "Big Government."

Finally, while expenditures adhere to programmed allocations and revenues fluctuate based on economic and financial conditions as well as administrative efforts, they remain inherently volatile.

Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond.

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout.

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability.

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

Let us now examine the details.

In October, public revenue surged by 22.6%, driven primarily by a 16.94% growth in tax revenues, with the Bureau of Internal Revenue (BIR) contributing 16.19% and the Bureau of Customs (BOC) 11.5%. Meanwhile, non-tax revenues soared by 87.7%, largely due to revenues from other offices, including "privatization proceeds, fees and charges, and grants."

These activities boosted the 10-month revenue growth from 9.4% in 2023 to 16.8% this year, largely driven by a broad-based increase, largely powered by non-tax revenues.

It is worth noting that, despite reaching a record high in pesos, the BIR’s net income and profit growth significantly softened to 8.3%, the lowest since 2021, remaining consistent with the 9-month growth rate.  This segment accounted for 50% of the BIR’s total intake. (Figure 2, middle pane)

In contrast, sales taxes jumped by 30.6% over the first 10 months, marking the highest growth rate since at least 2017, and represents 30% of the BIR’s total revenues. Sales taxes vaulted by 31.6% in the first 9 months. (Figure 2, lowest chart)

The reason for focusing on the 9-month performance is to compare its growth rate with that of the PSEi 30, allowing for a closer understanding or providing a closer approximation of the BIR's topline performance.

Figure 3

Unfortunately, when using same-year data, the PSEi 30 reported a 9-month revenue growth of 8.1%, the slowest since 2021. This pattern is echoed in its net income growth of 6.8%, which is also the most sluggish rate since 2021. (Figure 3 upper window) 

To put this in perspective, as previously discussed, the 9-month aggregate revenues of the PSEi 30 represent approximately 27.9% of the nominal gross domestic product (NGDP) for the same period. 

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect? 

In its September disclosure, the Bureau of the Treasury cited changes in the VAT schedule as a key factor boosting tax collections: " The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return" (Bureau of Treasury, October 2024) [bold added] 

Once again, the adjustment in VAT schedules played a pivotal role in increasing revenues, helping to reduce the deficit and debt—a topic we discussed in September 2024 (Prudent Investor, September 2024). 

Or, whether by design or as an unintended consequence, a critical factor in the slower deficit has been a shift in government tax collection and accounting procedures. 

But what will happen if, under the same economic conditions or with only slight improvements, the effects of such transient changes wear off? Will the deficit soar again? 

Moreover, it is important to note that all this is occurring while bank credit expansion and public debt are at record highs. 

What will happen to credit and liquidity-fueled demand once household and corporate balance sheets become saturated with leverage? 

It’s also noteworthy that, even as the share of revenue to nominal GDP (NGDP) reached its highest level in Q2 and Q3 of 2024, real GDP continues its downward trend—a dynamic that has persisted since 2016 and reemerged in 2021. (Figure 3, below graph) 

Are these not symptoms of the "crowding-out effect," where the increasing share of government interventions, measured by expenditures, debt, and deficits, translates into diminished savings and capital available for private sector investments? 

V. Record 10-Month Expenditure: The Push for "Big Government" 

But what about expenditures? 

Local Government Unit (LGU) spending surged by 11.97%, and national disbursement growth reached 14.3%, powering an overall increase in October expenditures of 11.1%. Interest payments, on the other hand, fell by 6.1%. The former and the latter two accounted for shares of 18.1%, 66.64%, and 11.9% of the total, respectively.

For the first 10 months of the year, expenditures grew by 11.5%, reaching a record-high Php 4.73 trillion, driven by LGU spending, National disbursements, and interest payments, which posted growth rates of 9.1%, 11.9%, and 23.03%, respectively.

As noted above, these record expenditures are primarily focused on promoting political agendas: pre-elections, a subtle shift towards a war economy, and an emphasis on centralization through infrastructure, welfare, and bureaucratic outlays.

Figure 4

One notable item has played a considerable role: 10-month interest payments not only outperformed other components in terms of growth but also reached a record high in peso terms. (Figure 4, topmost graph) 

Additionally, their share of total expenditures rose to levels last seen in 2009. 

That said, the ratio of expenditures to NGDP remains at 23.98% in Q2 and Q3 and has stayed within the range of 22% to 26%—except for two occasions—since Q2 2020. (Figure 4, middle chart) 

Over the past 18 quarters, this ratio has averaged 23.4%. 

As mentioned above, despite all the hype about achieving "upper middle income" status and attaining a "Class A" credit rating, the Philippines continues to operate under a fiscal stimulus framework, which has only intensified with recent policies which I dubbed as "Marcos-nomics stimulus."

In the timeless words of the distinguished economist Milton Friedman, "Nothing is so permanent as a temporary government program."

Current conditions also validate the "Big Government" theory articulated by the economist Robert Higgs, particularly regarding what he termed "The Ratchet Effect." This concept refers to the "tendency of governments to respond to crises by implementing new policies, regulations, and laws that significantly enhance their powers. These measures are typically presented as temporary solutions to address specific problems. However, in history, these measures often outlast their intended purpose and become a permanent part of the legal landscape." (Matulef, 2023)

The push towards "Big Government" is evident, with approximately a quarter of the statistical economy deriving from direct government expenditures.

This figure does not include the indirect contributions from private sector participation in government activities, such as public-private partnerships (PPPs), suppliers, outsourcing and etc. 

As a caveat, the revenue and expenditure-to-NGDP ratio is derived from public revenue and spending data and nominal GDP—an aggregate measure where government spending is calculated differently—potentially leading to skewed interpretations of its relative size. 

In any case, as the government grows, so too does its demand for resources and finances—all at the expense of the private sector, particularly micro, small, and medium enterprises (MSMEs), as well as the purchasing power of the average Filipinos, represented here as Pedros and Marias. 

While government fiscal health may provide some insights into its size, there are numerous hidden or immeasurable costs associated with its expansion: compliance costs, public sector inefficiencies, regulatory and administrative burdens, policy uncertainty, moral hazard, opportunity costs, reduced incentives for innovation, deadweight losses, productivity costs, economic distortions, social and psychological costs, and more.

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

Rising interest payments represent some of the symptoms of "Big Government."

What’s remarkable is that, in just the first 10 months of 2024, the cost of servicing debt (amortization plus interest) soared to an all-time high of Php 1.86 trillion—16% higher than the previous annual record of Php 1.603 trillion set in 2023. And there are still two months to go! (Figure 4, lowest visual)

Amortization and interest payments exceeded their 2023 annual figures by 25.3% and 1.65%, respectively. 

Notably, amortization payments surged by a staggering 760% in October alone, reaching Php 161.5 billion.

As a result, amortization and interest payments have already surpassed their full-year 2023 totals. However, because the government categorizes amortizations (or principal payments) as financing rather than expenditures, they are not included in the budget.

VII. Rising Foreign Denominated Debt Payments!

There's more to consider.

Figure 5

Payments (amortization + interest) on foreign-denominated debt in the first 10 months of 2024 increased by 52%, reaching a record high. This brought their share of total payments to 21.9%, the highest since 2021. (Figure 5, topmost chart)

Unsurprisingly, the government borrowed USD 2.5 billion in the end of August, likely to refinance existing obligations. Adding to this, authorities reportedly secured another $500 million loan from the Asian Development Bank last week in the name of "climate financing."

Nonetheless, these serve as circumstantial evidence of increased borrowing to fund gaps, reflecting the "synthetic dollar short" position discussed last week.

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

Here’s where mainstream narratives often place emphasis: a slower deficit translates into slower growth in public debt. (Figure 5, middle graph)

In other words, a decrease in financing requirements or a reduction in the rate of increase in public debt decreases the debt/GDP ratio.

Authorities are scheduled to announce public debt data next week.

The apparent gaslighting of fiscal health suggests that authorities are employing tactical measures to improve macroeconomic indicators temporarily. These efforts seem aimed at buying time, likely in the hope that the economy will gain sufficient traction to mask structural weaknesses.

Still, while public debt continues to rise—albeit at a slower pace—bank financing of public debt through net claims on the central government (NCoCG), which began in 2015, appears to have temporarily plateaued. At the same time, the BSP's direct financing of the national government seems to have stalled. (Figure 5, lowest image)

However, none of these emergency measures have reverted to pre-pandemic levels.

The government shows no indication of weaning itself off the stimulus teats.

IX. Q3 2024: Public Debt to GDP rises to 61.3%

Unfortunately, the record savings-investment gap underscores a troubling reality: the GDP is increasingly propped up by debt.

While mainstream narratives highlight the prospect of a lower public debt-to-GDP ratio, they often fail to mention that public debt does not exist in isolation.

In the aftermath of the Asian Financial Crisis, the Philippine economy underwent a cleansing of its balance sheet, which had been marred by years of malinvestment. When the Great Financial Crisis struck in 2007-2008, the Philippine economy rebounded, aided by the national government’s automatic stabilizers and the BSP's easing measures.

However, during that period, the BSP mirrored the Federal Reserve's policy playbook, prompting the private sector to absorb much of the increased borrowing. This reduced the economy’s reliance on deficit-financed government spending and shifted the debt burden from the public to the private sector, enabling a decline in the public debt-to-GDP ratio.

Today, however, this is no longer the case.

Figure 6

Following the pandemic-induced recession, where bank credit expansion slowed, the government stepped in to take the reins, driving public debt-to-GDP to surge. As of Q3, it remained at 61.3%—the second highest level since 2021’s peak of 62.6% and the highest since 2004. 

Currently, despite high-interest rate levels, both public borrowing and universal commercial bank lending have been in full swing—resulting in a systemic leverage ratio (public debt plus universal commercial bank credit) reaching 108.5% of nominal GDP in 2023. 

This means that the government, large corporations, and many households with access to the banking system are increasingly buried in debt.  

In any case, debt is perceived by consensus as a "free lunch," so you hardly ever hear them talk about it. 

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

In conclusion, while current fiscal metrics may appear to show surface-level improvements, the government remains addicted to various free-lunch policies characterized by easy money stimulus. 

The government and elites will likely continue to push for a credit-driven savings-investment gap to propel GDP growth, leading to further increases in debt levels and necessitating constant liquidity infusions that heighten inflation risks. 

The establishment tend to overlook the crowding-out effects stemming from government spending (and centralization of the economy), which contribute to embedding of the "twin deficits" that require more foreign financing—ultimately resulting in a structurally weaker economy. 

The relentless pursuit of "upper middle income" status resembles a futile obsession—a "wet dream" driven more by the establishment’s obsession with benchmarks manifesting social signaling than substantive progress. 

For distributional reasons (among many others), the GDP growth narrative does not reflect the true state of the economy. 

Persistent self-rated poverty and hunger, widening inequality, elevated vacancies in the real estate sector, low savings rates, and stagnating productivity are clear indicators that GDP number benefits a select few at the expense of many. This, despite debt levels soaring to historic highs with no signs of slowing. 

Even the Philippine Statistics Authority’s (PSA) per capita consumer and headline GDP trendlines contradict the notion of an imminent economic or credit rating upgrade. 

While having the U.S. as a geopolitical ally could offer some support in the pursuit of cheaper credit through a potential credit upgrade, it is important to acknowledge that actions have consequences—meaning the era of political 'free lunches' are numbered. 

And do authorities genuinely believe they can attain an economic upgrade through mere technical adjustments of tax schedules and dubious accounting practices, akin to the "afternoon delight" and 5-minute "pre-closing pumps" at the PSEi 30? 

Yet because the political elites benefit from it, trends in motion tend to stay in motion, until… 

___

References 

Prudent Investor, September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso October 28, 2024 

Department of Budget and Management, THE BUDGETING PROCESS, March 2012, dbm.gov.ph

Bureau of Treasury, September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024, treasury.gov.ph

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024

Michael Matulef Beyond Crisis: The Ratchet Effect and the Erosion of Liberty, August 18, 2023, Mises.org

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar

  

interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size printing a constantly devalued currency—Daniel Lacalle

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar 

Last week, the USD-Philippine peso retested its all-time high of 59, or the BSP's "Maginot Line," which they misleadingly attribute to the "strong USD." The historic savings-investment gaps translate into a case for a weaker peso. 

I. The USDPHP Retest the 59 ALL Time High Level; The "Strong Dollar" Strawman 

The US dollar-Philippine peso exchange rate $USDPHP hit the 59-level last Thursday, November 21st—a two-year high and the upper band of the BSP’s so-called "Maginot Line" for its quasi-soft peg. The Bangko Sentral ng Pilipinas (BSP) attributed this development to the strength of the US dollar, explaining: "The recent depreciation of the peso against the dollar reflects a strong US dollar narrative driven by rising geopolitical tensions…The peso has traded in line with the regional currencies we benchmark against."

Figure 1 

To validate this claim, we first examine the weekly performance of Asia's currencies. While the US Dollar Index $DXY surged by 0.8% this week, most of the gains were driven by the euro's weakness.  (Figure 1, upper window) 

Among Bloomberg’s quote of Asian currencies, 8 out of 10 saw declines; however, the Thai baht bucked the trend and rallied strongly, while the Malaysian ringgit also closed the week slightly higher. (Figure 1, lower graph) 

The US Dollar averaged a 0.4% increase against Asian currencies this week. 

However, the strength of the Thai baht and Malaysian ringgit contradicts or disproves the idea that all regional currencies have weakened against the USD.

Figure 2 

A second test of the claim that a "strong dollar is weighing on everyone else, therefore not a weak peso" is to exclude the US dollar and instead compare the Philippine peso against the currencies of our regional peers: the Thai baht $THBPHP, Malaysian ringgit $MYRPHP, Indonesian rupiah $IDRPHP, and Vietnamese dong $VNDPHP. (Figure 2) 

From a one-year perspective, the Philippine peso has weakened against all four of these currencies, providing clear evidence that its decline was not limited to the US dollar but extended to its ASEAN neighbors as well. 

Ironically, the same ASEAN majors have recently joined the BRICS. Have you seen any reports from the local media on this? 

The $USDPHP ascent to 59 has been accompanied by a notable decline in traded volume and volatility, suggesting that the BSP has been "pulling out all stops" to prevent further escalation. 

This includes propagating to the public the "strong US dollar" strawman. 

II. BSP’s Interventions and the Case for a Weaker Peso: Record Savings-Investment Gap 

Figure 3

Since the BSP is among the most aggressive central banks engaged in foreign exchange intervention (FXI), it can surely buy some time before the USDPHP breaks through this upper band and tests the 60-level. (Figure 3) 

We have long been bullish on the $USDPHP for the simple reason that the historic credit-financed savings-investment gap (SIG), manifested primarily through its "twin deficits" (spending more than producing), translates to diminished local savings. 

This, in turn, means more borrowing from the savings of other nations to fund excessive domestic consumption. 

Accordingly, the SIG is inherently inflationary, which results in the debasement of the purchasing power of the peso—an indirect consumption of the public's savings. 

In any case, the USD Philippine Peso exchange rate ($USDPHP) should be one of its best barometers and hedge against inflation (Prudent Investor, April 2024) 

In other words, since there is no free lunch, someone will have to pay for the nation’s extravagance.

Figure 4

The Philippine external debt's streak of record highs coincides with the pandemic-era deficit spending levels. Apparently, this stimulus suffers from diminishing returns as well. 

This is apart from the BSP’s financial repression policies or the inflation tax, which redistributes the public’s savings to the government and the elites. 

Such capital-consuming "trickle-down" policies combine to strengthen the case for a weak peso. 

Yet, the continued rise in external debt indicates that the Philippines has insufficient organic US dollar resources (revenues and holdings), despite the BSP’s claims through its Gross International Reserves (GIR). 

To keep this shorter, we will skip dealing with the BSP’s GIR and balance sheet. 

Nonetheless, rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Snider, 2018) 

As a result, the country becomes more vulnerable to a dollar squeeze. 

Hence, the BSP hopes that, aside from cheap credit, loose monetary conditions will prevail, allowing them to easily access cheap external funding. 

However, by geopolitically aligning with the West against the Sino-Russian-led BRICS, the Philippines increases the risks of reduced access to the world’s savings. 

As an aside, the Philippines attempts to mimic the United States. However, because the US has the deepest capital markets and functions as the world’s de facto currency reserve, it has funded its "twin deficits" by absorbing the world’s "surpluses"—the "exorbitant privilege." 

Unfortunately, not even the US dollar standard, operating under present conditions, will last forever, as it fosters both geopolitical and trade tensions. 

III. USDPHP: Quant Models and the Lindy Effect

Figure 5

We are not fans of analytics based on exchange rate quantitative models such as the Deviation from Behavioral Equilibrium Exchange Rate (DBEER), the Fundamental Equilibrium Exchange Rate (FEER), and Purchasing Power Parity (PPP), but a chart from Deutsche Bank indicates that the Philippine peso is among the most expensive world currencies. 

Needless to say, all we need is to understand the repercussions of free-lunch policies. 

People have barely learned from past lessons. The USDPHP remains on a 54-year long-term uptrend, even after enduring episodic bouts of financial crises—such as the 1983-84 Philippine debt restructuring and the 1997-98 Asian crisis. 

The sins of the past have been resurrected under the alleged auspices of "this time is different; we are doing better." 

Following the Asian Crisis, a relatively cleansed balance sheet allowed the peso to stage a multi-year rally from 2005 to 2013. 

Unfortunately, we have since relapsed into the old ways. 

Because the elites benefit from the trickle-down policies, there is little incentive for radical reform. 

The "strong US dollar" only exposes the internal fragilities of a currency. 

Therefore, trends in motion tend to stay in motion until a crisis occurs. 

The USD-PHP seems to exemplify the Lindy effect: the longer a phenomenon has survived, the longer its remaining life expectancy. 

___

References

Prudent Investor, Navigating the Risks of the Record Philippines’ Savings-Investment Gap, February Public Debt Hits All-Time High and March CPI Reinforces the Deficit-CPI Cycle Tango April 8, 2024

Jeffrey P Snider, The Aid of TIC In Sorting Shorts and Shortages, October 17, 2018

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

 

Inflation was created by the wrong monetary policy, and incorrect central bank measures may have lasting negative impacts on the economy. The first effect is evident: governments continue to crowd out the real economy, and families and businesses suffer the entire burden of rate hikes. Maybe the objective was always to increase the size of the public sector at any cost and implement a gradual nationalization of the economy—Daniel Lacalle 

In this issue

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

I. Clarifying Our Analytics of the PSEi 30 Data

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

V. Analysis by PSEi 30 Member Firms (9-Month)

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression 

The PSEi 30’s lackluster fundamental performance validated the mainstream’s unexpected decline in Q3 GDP, highlighting the persistent effects of crowding out and financial repression. 

I. Clarifying Our Analytics of the PSEi 30 Data 

Two factors must be explained before delving into the 9-month and third-quarter analysis of the performance of PSEi 30 constituent firms. 

First, the definition of data is crucial.  

-Data from the same reporting coverage provides a more accurate comparison, as it reflects the PSEi members during the relevant period. This is referred to here as 1A data.

-Data from a different reporting coverage/period results in an apples-to-oranges comparison due to two factors: periodic updates to PSEi constituents and the exclusion of past data revisions. This is referred to as 1B data.

-Aggregates may be overstated, as they include not only holding companies but also their subsidiaries.

Q3 PSEi 30’s Financial Activities: Defining the Operating Conditions

Next, it is essential to define the operating conditions of the third quarter.

Figure 1

The Philippine Q3 2024 GDP unexpectedly slipped to 5.2%, its lowest level since Q2 2023’s 4.3%, despite systemic leverage hitting an all-time high.  (Figure 1, upper graph)

Public debt and bank credit expansion grew by 11.4%, marking its fastest pace since Q4 2022.

The Bangko Sentral ng Pilipinas (BSP) initiated its "easing cycle" with a 25-basis point rate cut in August, which helped fuel this growth.

Despite reaching the near all-time high employment rate, both headline and core inflation rates fell to 3.2% and 2.6%, respectively, the lowest since Q1 2022. (Figure 1, lower graph)

Figure 2

Marcos-nomics stimulus, channeled through its fiscal aspect, remained vibrant, with public spending growing by 6.4% in Q3, reaching its third-highest level. (Figure 2, upper image)

Once again, despite record leverage, money supply growth, measured by M3, stumbled to its lowest level since Q3 2022.

It was an active period for fiscal and liquidity operations by the banking system and the BSP. As a ratio to GDP, banks' net claims on the central government (NCoCG) reached the third-highest level on record, while the BSP's counterpart dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure 2, lower diagram)

In contrast to the establishment’s "restrictive" narrative, Q3 indicated loose financial conditions, which were further bolstered by the BSP’s rate cut and sustained increases in systemic leverage, supported by BSP and bank liquidity, as well as fiscal operations.

The notion that the BSP’s easing would provide support to the economy not only failed to materialize; consumption fell, as evidenced by the declining trend in the Consumer Price Index (CPI) and the money supply—ironically occurring despite strong liquidity injections.

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

These macroeconomic conditions were reflected in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):

Figure 3

One. The aggregate non-financial debt increased by Php 208 billion, marking the lowest increase since 2020. This figure excludes borrowings of the three largest banks (Figure 3, topmost table) 

Two. The cumulative net income growth of Php 47.17 billion was also the smallest since 2021. 

Three. Revenue expansion, totaling Php 395 billion, was the second lowest since 2021. 

Four. The PSEi 30’s cash reserves shrank by Php 5.27 billion for the second consecutive year, but at a more minimal scale compared to last year. 

These figures indicate that all segments exhibited a slowdown, with net income experiencing the most pronounced decline. 

There’s more. 

Because the non-financial debt-to-net income ratio in 2024 represented the second highest level since 2022, it indicates that corporations borrowed more to generate income (Php 4.4 debt for every peso of net income). (Figure 3, middle graph)

Additionally, they borrowed to address their liquidity shortfall.

However, this data understates the full picture, as it excludes the borrowings of the three largest banks. These banks reported an increase of Php 491 billion in bills payments alone!

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

Nota Bene: While we rely on the accuracy of these reports, it is worth noting the potential for discrepancies. Past instances, such as PLDT’s 4-year "budget overrun," demonstrate that reporting errors often go overlooked or ignored by both the PSE and government agencies.

Such regulatory lapses could create conditions that encourage misreporting, exemplifying the moral hazard syndrome.

We suspect that some companies may be understating the extent of their leverage by reclassifying it under other liability categories

Debt: In nominal terms, non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php 5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes bank debt. (Figure 3, lowest window)

Net Income: Published net income expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93 billion. However, this represented the lowest growth rate since 2021.

Revenues: Despite historic increases in systemic leverage, near full employment and the third-largest public spending on record, revenue grew by an unimpressive 9.4%, reaching a record Php 5.265 trillion.

This also translates to a PSEi 30 revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating that these elite firms contribute more than a quarter of the estimated Nominal GDP. If we include all 284 listed firms, this figure would likely account for approximately two-fifths of NGDP.

This manifests the trickle-down structure of the Philippine political economy, where the prevailing approach prioritizes consolidating wealth and power among politically connected entities through centralization, rather than fostering genuine "inclusiveness" via grassroots entrepreneurship (such as SMEs) or a bottom-up framework.

Lastly, the government reported a headline GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by only 6.8% suggesting a significant overstatement of the statistical economy. 

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

Figure 4

Although the holding firms sector posted the smallest percentage growth, it experienced the largest increase in debt, amounting to Php 104.21 billion, followed by the real estate sector with Php 38.62 billion. (Figure 4, upper table)

The financials and holding firm sectors recorded the highest net income growth, with increases of Php 20.327 billion and Php 13.35 billion, respectively, accounting for 43% and 28.3% of the total.

The sector with the highest revenue growth was the holding firm sector, which generated Php 196.653 billion, followed by financials with Php 86.44 billion, representing 49.8% and 22% of the total, respectively.

Meanwhile, the services sector led in cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial sector experienced the largest cash outflows.

In Q3, holding firms and financials reported the highest net incomes of Php 16.84 billion and Php 7.8 billion, respectively. (Figure 4, lower table)

These two sectors also delivered the strongest revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.

In summary, during the nine-month period and in Q3, the financials and holding sectors dominated net income and revenue growth, while other sectors struggled to keep pace.

V. Analysis by PSEi 30 Member Firms (9-Month)

Figure 5

Broken down into individual categorical activities:

The top firms contributing to non-financial debt increases were San Miguel Corporation (SMC) and Ayala Corporation with increases of Php 63.9 billion and Php 57.6 billion, respectively.

Out of the 27 firms analyzed, 15 posted debt expansion during the period, with SMC accounting for 30% of the total debt growth in pesos.

In the net income growth segment of the PSEi 30, International Container Terminal Services, Inc. (ICT) and the Bank of the Philippine Islands (BPI) were the top performers with Php 9.85 billion and Php 9.441 billion, correspondingly.

On the other hand, DMCI Holdings (DMC) posted the largest decline among the eight firms that reported a decrease in net income growth.

SMC and BPI also led the revenue growth segment. Conversely, DMC reported the largest revenue decrease among the seven firms that experienced revenue declines during the period. Notably, SMC accounted for 30% of total revenue growth in peso terms.

Finally, ICT emerged as the leader in cash reserves growth, while Aboitiz Equity Ventures (AEV) headed the minority of ten issues that saw reductions in cash flows.

Once again, even among the elite firms, only a select few tend to dominate in terms of performance.

Notably, financial giants such as BPI and BDO emerged as some of the most prominent gainers, while non-consumer sectors, including ICT and SMC, led in the net income and revenue segments, respectively.

Interestingly, the underwhelming performance of consumer-focused firms like SM Investments and Ayala Corporation—arguably the most exposed to the local consumer market—highlights the underlying fragility of the sector

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

The Bottom Line: Despite the "Marcos-nomics stimulus," near-record employment levels, and loose financial conditions, the conspicuous signs of weakness among the PSEi 30 member firms not only align with the GDP slowdown observed in Q3 but may also indicate much slower overall growth.

Moreover, this underbelly has exposed the firms’ increasing vulnerability to extensive leveraging.

What is particularly notable is that many of these PSEi 30 firms are linked to political projects that should have enhanced their performance.

Instead, their underwhelming performance could be indicative of the detrimental effects of the crowding-out syndrome—a phenomenon that gradually erodes economic productivity over time—compounded by financial repression and other forms of government interventions (such as the subtle shift to a war economy, increasing centralization and more).