This interesting (October 4) Reuter’s article “It's the economy: Duterte not main cause of Philippines market selloff” draws from a James Carville’s political campaign “It’s the economy, stupid” shibboleth (bold mine)
Philippine markets have been heavily sold down since July, primarily for economic reasons, not the festering row between new President Rodrigo Duterte and traditional ally the United States over his war on drugs, money managers say.
A slowdown in remittances from Filipinos working overseas, which have historically been a big driver of growth in the Southeast Asian nation, is a cause of concern.
For bond investors, a bigger concern is the heavy correlation between Philippine bonds and US Treasuries, and the potential for Philippine bond prices to drop as market participants prepare for the Federal Reserve to raise its near-zero rates.
"Everybody's pointing to Duterte," said Erwin Balita, a fund manager at BPI Asset Management in Manila. "But for me, it’s really the fundamentals of the country. The drop in remittances is a big game changer," he said. BPI manages around P700 billion ($14.5 billion) in the Philippines.
The Philippines is one of Asia's most active issuers of US dollar-denominated bonds. With Asia's second-highest growth rate, it has been a haven for yield-hunting foreign investors over the past couple of years…
I see two perspectives here. One, cited experts truly believe in what they say. Or two, the above represents a press release aimed to whitewash domestic politics.
Yes, Pre Duterte Economy Has Been a Factor
If the idea is that the pre-Duterte regime economy has signified as the critical issue for the recent market weakness, then has the mainstream been finally coming into my fold?
For instance, remittance was been cited as a major factor “big game changer”.
But the decline in remittances has NOT been new (based on the government’s own data). I have been saying since time immemorial.
Remittances growth has been on a declining trend since peaking out in 2013. Yet it’s only in the 2H of 2015 where remittances have started to exhibit negative growth or contractions (see below chart/upper window). The difference was that in 2015, the BSP resorted to statistical chicanery to shield the public from learning of such negative developments. And this is one major reason why I suspected that the BSP moved to implement silent stimulate the economy in 4Q 2015 and 1Q 2016.
But remittance as “it’s the economy stupid” slogan has critically been ignored and dismissed by the mainstream consensus when the stock market rose.
As proof, the Phisix had been vertically pumped in 6 months from late January to July 2016 to almost reach the April 2015 high. The scale of vertical pumping incredibly halved the 13 month period accomplished by the 2014-2015 predecessor. Such impassioned one directional conviction essentially dismissed the influence of declining remittances on the economy.
The fundamental premise sold by the same mainstream consensus has been soaring stocks equals G-R-O-W-T-H! Period.
Remittances? Well, these were consumed by the economic black hole.
It’s only from the July 2016 data that posted a 5.4% contraction in OFW remittances which ironically coincided with the peak of the vertical pumping at the PSE that appears to have attracted expert opinion.
Aside from remittances, beyond the government's raft of “buoyant” statistics, I have repeatedly been pointing out that government revenues or taxes have likewise been on a significant downtrend.
The paradox has been while the government continues to churn out fantastic G-R-O-W-T-H or GDP numbers, revenue collections have been going in the opposite direction!
Like remittance growth, government revenue growth rates culminated in 2013 and have generally turned lower. In the 2Q 2016, government revenue growth shriveled to just 1.1% even as GDP was cited at simmering 6.8%
In the first month of the new administration or in July 2016, government revenues even contracted by a huge 4.6% as the public sector’s deficit swelled by 57%!
Just how can a rapidly growing economy see tax revenues diminish at a swift pace which almost signified a mirror image of GDP (in 2015)? Beats me. But this represents mainstream economics. Or self-contradictingopinions from highly paid experts whose role appears to only pitch sales. Except that the advertising themes have been garbed with economic vernaculars to make them look like an economic opinion from an expert.
Even changes in eps for PSE listed firms stagnated in 2015. Yet it took the BSP’s stoking of bank credit (silent stimulus) to boost 2Q earnings. Ironically, the BSP’s action managed to substantially boost eps conditions of a few companies which lifted the average. But this is enough because mainstream fixates only on headline issues.
Strangely, I haven’t seen the August data on the fiscal balance of the government. The Bureau of Treasury usually publishes the government’s fiscal balance during the first week of the month. Must there be some kinks for the procrastination?
As one can see, even prior to the assumption of the new administration, economic troubles have already been building. Such has been occurring underneath the torrent of survey based fabulously constructed various G-R-O-W-T-H numbers. Apparently, such has been designed to boost the animal spirits to line up the pockets of the establishment.
And du jour politics reveals of the extent of free money mentality—or the belief that money has been so abundant for them to do anything they want! That’s because, for them, costs do not exist!
This is not to exculpate the Duterte government, but to demonstrate of causality (the cause and effect relationship) in the context of ordinal sequences. Actions by the previous administrations represent the first order of causes. Actions by the current leadership aggravate on EXISTING conditions while at the same time CREATING new conditions. This represents a transition from first order to the second order (epiphenomenon)
It’s Not Just the Economy, It’s the Politics Stupid!
As a second perspective, I propounded that the comments by experts cited in the article as an official press release that masquerades as financial opinion.
Why do I say so?
Because if one reads mainstream materials, the Philippines has already achieved economic NIRVANA!
Asset prices (stocks, bonds and properties) are the only prices that have material significance to the economy, that’s the predominant themes gleaned from their literatures.
And these have been justified with a litany of statistics to prove G-R-O-W-T-H as the pillar to impulsive price chasing dynamics. And because of G-R-O-W-T-H, valuations do not matter at all!
In the mainstream’s world, costs are essentially swept under the rug. That’s because political actions, bank credit inflation and soaring asset prices can only have net benefits!
And in the mainstream’s world, because of “sound” endogenous conditions, risks can emerge only from exogenous sources.
For instance, the US Fed has served as the most convenient bogeyman for the turmoil in Philippine assets. The Fed’s proposed actions to raise interest rates have become a meme. That’s even if the FED has delayed raising rates for the sixth time! From Bloomberg September 21: “The sixth straight hold extends U.S. central bankers’ run of getting cold feet amid risks from abroad and inconsistent signs of economic strength.”
And if turbulence from risks should transpire, this will signify only "an anomaly" where the troubles will simply breeze over. Happy days, from free lunches, will be back!
Yet fascinatingly the same report evinces signs of domestic bubbles: “The Philippines is one of Asia's most active issuers of US dollar-denominated bonds. With Asia's second-highest growth rate, it has been ahaven for yield-hunting foreign investors over the past couple of years…”
So another irony or perhaps coincidence would be that the currency, the Philippine peso has weakened from the same starting point as with remittances and government revenues—in 2013! Have these been signs of diminishing global liquidity?
And as one of the “most active issuers of US dollar-denominated bonds”, this means that a significant part of the domestic financial system’s leverage buildup has been anchored on “US dollar shorts”.
Many firms earn pesos just to pay such USD equivalent liabilities. Or, these firms would have to source or secure USD first (through an exchange with peso) to pay USD debts. This makes the system vulnerable to the changes in the conditions of “stocks” or “inventory” of US dollar, or the availability of US dollars.
Should a USD shortage occur, then the same borrowers will effectively scrounge for US dollars at even higher cost! As I noted last week, this has been happening now to wholesale financial markets of Europe viaeuro USD swap rates (Bloomberg September 30) and in Japan. Here’s the Financial Times October 6 on Japan’s USD crunch: “In euro-dollar and yen-dollar basis markets we have seen a strong impact,” said Camille de Courcel, an interest rate strategist at BNP Paribas. “Foreign banks have to pay more to get dollar funding and investors are using it more than in the past as well.” A three-month swap exchanging yen for dollars tied to the benchmark borrowing rate Libor has a basis of minus 75 basis points, meaning it costs the investor about 0.75 per cent over the three months to borrow dollars. This stood at just minus 30 bps at the start of the year. The increasing cost of accessing the basis market appears to be taking its toll, with volume in the yen-dollar market in September 2016 falling to its lowest level since June 2014, according to data from ClarusFT.”
And the higher cost would crimp on profits at a time when eps conditions have been fragile.
So in my view, the domestic mainstream experts may be (perhaps mis-) quoted by media as to explain current market developments in connection with current events or factors readily identifiable by readers or the “available bias”.
As a side note, I am no stranger to this. In the past, I had been occasionally interviewed and quoted by domestic media. But when media began selectively choosing my quotes to reinforce what they want to say rather than what I was talking about, I abstained and refrained from further exposures.
But then again, based on establishment literatures, risks are hardly considered as factors to the incumbent economic and financial environment. It's a one-way trade!
So it must be that the information culled from quoted experts may have been part of the PR campaign to blanch negative influences from actions made by the political leadership.
Let me rephrase or paraphrase James Carville’s “It’s the economy stupid”. From the present Philippine setting, it should be: it’s not just the economy, but it’s also the politics, stupid!
The BSP’s Derivatives Propped GIRs Will Add Pressure on the Peso, Philippine CDS Prices Soar!
And here’s more on USD shorts. The BSP declared last week that Gross International Reserves (GIR) zoomed to a new record $85.9 billion (see lower right window)
To be fair, the BSP didn’t say new record. That’s my imputation given the nominal official figures.
The BSP attributed the rise “to the National Government’s (NG) net foreign currency deposits, the BSP’s foreign exchange operations and its income from investments abroad, along with revaluation adjustments on its gold holdings resulting from the increase in the price of gold in the international market. These were partially offset by payments made by the NG for its maturing foreign exchange obligations.”
By category, GIRs rose by USD 107 million in September. Gold rose by only USD 45 million. The deficits as publicly enunciated as “maturing foreign exchange obligations” can be seen via the USD 276.5 millionretrenchment in foreign investments (lower window left pane).
In replacement, or to neutralize such deficit, the BSP used “foreign exchange operations” or the forward derivatives book to the tune of USD 328 million to reach a record high of USD 2.3 billion! (upper window)
In other words, the BSP has been borrowing USD at record amounts to cosmetically embellish the USD stock of the Philippine financial system!!!!
Aside from forex derivatives, it is likely that 5%+ growth in USD debt incurred by the Philippine government as noted by the Bureau of Treasury data over the past 13 months may have been partly channeled to bolster BSP reserves
Unless an audit will be authorized, the public will never know the true nature of “international reserves” held or stashed at the BSP.
Given the amplified weakness in the peso, it’s pretty much obvious that all these must have been contrived to stabilize the peso through the illusion of ampleness or the supposed wall of USD stocks.
The fact that the currency (USD php) market “disagrees” or brazenly distances itself with the BSP’s statistics reveals that either the currency market recognizes the artificiality of the GIR conditions, or that they have been projecting future weakness through a massive deterioration of the GIRs, most likely from an explosive rise in budget deficits due to huge expansion in public spending, or a perceived weakness in the economy or both!
And while the BSP thinks that artificial props may be enough to reverse or contain the surge in USD demand, official USD borrowing or US shorts used to shore up international reserves through wholesale finance can only accelerate the decline of the peso and international reserves by shifting funding disruption into the future.
And beyond all the statistical artifices and PR campaign mounted by establishment apparatchiks where the popularity of leadership has been reasserted as the primary force of the evolving state of the Philippine political economy, the same Reuter’s article reiterates the warning by US credit rating agency S&P on the Philippines.
Meanwhile, one fallout of Duterte's erratic behavior is likely to be the Philippines' sovereign ratings. Standard & Poor's rating agency has warned that the unpredictability over his policies could undermine the chances of an upgrade for the Philippines and might even lead to a downgrade of the country's BBB/A-2 investment grade rating.
Not only does it seem that the public is being conditioned for a credit downgrade (it’s the second time in less than a month for S&P to air such threats), aside from the peso, the cost to insure Philippine debt or 5 year CDS (based on Deutsche Bank data) has spiraled to pre-election highs!
And any further price spikes in Philippine CDS that exceeds the January 2016 highs will most likely presage a credit downgrade!
And this should be expected given the sustained antagonistic, brinkmanship and blackmail geopolitics embraced by the leadership just to promote an ochlocratic dictatorship!
The spike in CDS means the price of credit goes up. A downgrade institutionalizes diminished access or more costly access to credit.
Downgrades are just a part of the many potential ramifications from present policies.
The other templates (discussed last week): reduction of investments, portfolio and credit flows and diminished access not only to credit but to investments as well, heightened risks of economic and financial sanctions, geopolitical isolationism, and political destabilization. The ultimate black swan could be a shooting war with the US government.
One thing leads to another. Eventually, the establishment may not able hide the adverse consequences from the actions of the leadership who will serve as the accelerator not only to the unraveling of the mounting economic and financial imbalances inherited by this government from the previous two regimes but more importantly, to the fresh risk horizon they have created.
Actions have consequences. Present political developments have exhibited consequences that have emerged faster than I thought it would.
Final Thoughts: Why the September CPI Surge Bodes Ill for Domestic Consumption
By the way, I was right, the USD peso did retrace (-.4%). There may be more pullback considering the sizeable overbought conditions from the vertical climb. USD Php 48 should be a buying entry point.
But watch for the next leg up!
And another thing, actions have consequences, the cost of the BSP silent stimulus has emerged in the form of higher CPI (no data yet for M3 and bank loans).
The BSP declared that CPI soared to 2.3% September from 1.8% in August. The BSP noted that “the uptick in inflation for September was traced mainly to higher price increases in key food items particularly fish, fruit, as well as oils and fats. Rice prices were also higher due to the ongoing lean season while vegetable prices were pushed up by tightness in domestic supply owing to weather-related production disruptions. At the same time, upward price adjustments of selected domestic petroleum products also contributed to higher non-food inflation.”
Higher CPI must have also been a factor to the peso’s weakness
Yet forces that have most likely contributed significantly to the surge in September CPI.
One, a likely spike in September bank loans and subsequently M3. Two, a weak peso. Three, huge public sector deficit in September from a massive increase in government spending on the bureaucracy (possibly even infrastructure). Four, a combination of the above.
While the political segments of the political economy may have acquired additional purchasing power due to mandatory increases in pay and from an expanded bureaucracy, this will come with enlarged deficits that will be financed by present taxes and or future taxes (higher debt, higher taxes) and or BSP monetization (inflation) of deficits.
Resident consumers have hardly recovered from the stealth raid on the purchasing power of their peso through 10 months of 30+++% money supply growth that spiked CPI to 4.9% in 2013-2014, now comes a resurgence of government’s measure of CPI!
Regardless of what government “rosy” data say, I believe that it won’t take another 4.9% CPI to substantially attenuate consumer spending.
That’s because whatever spending bonanza that has graced tax consumers will come at the immediate expense of tax producers. And not only will investments and job growth slow, consumption from the tax producers will materially languish.
With the present direction towards an ochlocratic dictatorship, tax consumers will continue to gnaw at resources of tax producers at a rapid clip.
As a dear friend recently suggested, aside from foreign currencies, perhaps an insurance against having one’s standard of living from being sustainably plundered is to become a tax consumer.
Hmmm.
