Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

The deprostitutionalization of research can be done as follows. Force people who want to do “research” to do it on their own time, that is to derive their income from other sources. Sacrifice is necessary. It may seem absurd to brainwashed contemporaries, but Antifragile documents the outsized historical contributions of the nonprofessional, or, rather, the non-meretricious. For their research to be genuine, they should first have a real world day job, or at least spend ten years as: lens maker, patent clerk, mafia operator, professional gambler, postman, prison guard, medical doctor, limo driver, militia member, social security agent, trial lawyer, farmer, restaurant chef, high volume waiter, firefighter (my favorite), lighthouse keeper, etc., while they are doing their initial research. It is a filtering, nonsense expurgating mechanism—Nassim Taleb

In this issue

Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

-Survey Says Philippine Peso Most Resilient Currency, Market Disagrees

-Statistical Rationalizations Fail to Appease Peso Bears

-Peso’s Woes: It’s the Political Economy, Stupid!

-The Philippines Will NOT Be Immune to External Influences

-Has USD php 50 Been the BSP’s Maginot Line? Why the Peso Will Fall Further

Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

Once again, the USD Philippine peso (php) hit 50, a 2009 high, last week, before settling down to close at 49.92 or higher by .56%.

Survey Says Philippine Peso Most Resilient Currency, Market Disagrees

Curiously, the Bloomberg conducted a poll on experts who predicted which Asian currencies would outperform in 2017

The survey’s result: the Philippine peso. The peso is “being tipped as the one likely to suffer least from the global slings and arrows of 2017”, that’s primarily anchored on the notion that the Philippines “doesn’t largely depend on trade, especially with China or the U.S.”

Although the survey included many other factors such as geopolitical risks, developed market central bank policies, china economic slowdown, oil prices, Trump foreign policies, Trump trade policies and Europe’s risks.

Yet such crowd of experts, who see statistics as equal to economics or naïve empiricists, have been off to a really bad start.

 

In 2016, the USD php rose 5.65% and was the second strongest performer in 2016 after USD cny (yuan). See upper right window.

Yet 41.6% of the year’s USD php gains came from the post Trump electoral victory (upper left window)

To extend this perspective, since Trump won on November 8, the USD php rose 2.76% through Friday(January 20).

And for the week, among Asian currencies, the peso along with the Indonesian rupiah had been this week’s only major losers (lower right window).

Year to date, the peso and India’s rupee have accounted for as the worst performers. Remember, India has suffered from a massive dislocation from a ban on the most widely used (86%) currency denomination 500 and 1,000 rupee notes.

Statistical Rationalizations Fail to Appease Peso Bears

This week’s USD php outperformance should be more of a puzzle to the mainstream.

The Yellen factor and US President Mr. Donald Trump’s comment on the US dollar where he sees the USD as “too strong…and it’s killing us” failed to make a dent on the USD peso.

The massive RECORD injection by the PBoC to contain intensifying domestic liquidity pressures, as well as thetightening noose or dragnet of capital controls helped the yuan bounce back (temporarily).

Yet little of these seemed to have helped the USD php.

On the other hand, reported domestic factors were in favor of the peso.

The BSP declared that OFW remittances soared by 18% in November and portfolio flows reported net inflows for 2016.

Even more, the Philippines government raised US $2 billion from the overseas market last week.

Yet the USD php appeared to have ignored or discounted them.

Despite the popular mainstream rationalizations, the $64 billion question is WHY the sustained underperformance of the peso? Or why has the peso been continually sold?

The obvious answer is that the market knows something more than what these experts think they know.

Also, if the Philippines has been immune to external forces, then why has local experts been repeatedly and piously been chanting that the Fed has been responsible for woes of the peso?

The experts hardly ever explain in media the supposed channels from which the FED policies supposedly influence the local currency.

Peso’s Woes: It’s the Political Economy, Stupid!

Yet the main answer is the supply side.

The BSP has been inciting a fiery credit boom. An inflationary boom intended to bankroll the government, directly through inflated taxes, and indirectly, through artificially lowered rates onpresent and future liabilities, and through easy access to cheap credit.

And such ferocious credit expansion has diffused into the uberperformance in the context of money supply growth relative to the US.

So even if the US FED doesn’t tighten, for as long as the Philippine banking system will churn out credit and money supply expansion at the current explosive rates, then the peso will WEAKEN(ceteris paribus or all things being equal).

As a side note, monetary interventions can, of course, interrupt or defer on the market adjustments. But markets eventually prevail.

The sins from the 10 successive months of 30%%%+++ money supply growth in 2013-2014 has yet to fully ventilate on the USD php. After the retrenchment in money supply growth in 2015, the BSP rekindled another boom last year through a massive bond buying program—the silent stimulus.

Even worst, the shift of the political economy to the left would aggravate the dilemma of the peso because of the crowding out effect, or “the substitution of labor for capital” which would manifest itself as burgeoning fiscal deficits.

And once the real economy effects/repercussions of the present credit boom peters out, staggers or flounders, this should bring to the surface the balance sheet risks of both the Philippine government and the banking system.

It is only from here, belatedly where statistics is economics experts will see such risks.

There is no free lunch.

The inflationary effects or ramifications from the credit boom will put a lid on its continuance. We have seen this in 2014 where the BSP raised reserve requirements, interest rates, SDA rates twice for each.

This tells us that the main source of the currency’s conditions will always emanate from internal dynamics—something which eludes and has been rabidly denied by the one way looking mainstream.

To paraphrase former US president Bill Clinton’s campaign strategist James Carville:, It’s the political economy stupid!

The Philippines Will NOT Be Immune to External Influences

In contrast to empiricists, the peso has not been and will not be immune to external developments.

Trade is not the only link between the Philippines and the world.

Aside from OFW remittances, investments (FDI and portfolio), ODAs, another major transmission avenue is CREDIT.

Like China, deteriorating balance sheets, capital flight and shortages of hard supply of the US dollar can function as sources of vulnerability. Even more, confidence can have a significant influence because it can alter market psychology.

Moreover, these factors can have a nasty feedback loop or become secondary causes for further escalation of turmoil.

 

The BSP’s reported December GIRs, as expected, fell again. It dropped by $ 406 million (upper chart). $335 million or 82.5% of the decline came from a decrease in foreign investments. The decline in foreign investments can partly be seen from November’s liquidation of US treasury holdings held by the Philippine government (lower window), data from US Treasury here. December’s Philippine holdings of US Treasury papers should reflect a decline too.

As one would note, BSP’s GIRs are TIED to external accounts (assets).

And as the peso plunged to a record 2009 level, the BSP’s forex holdings continued to swell at record pace. Last December, forex holdings, which most likely constituted swaps and forward contracts, expanded $74 million. Gold holdings dropped US $143 million from the fall in gold prices.

See, another link will be prices of commodities, whether they are exported or sold locally.

As a side note, another factor would be social mobility. Should many major countries put up a wall against migration, thereby sending home many overseas workers or unnaturalized citizens, not only will this affect remittances, it will affect domestic economy (through economic, social and political channels).

Economics is not about numbers but about PEOPLE.

Falling GIRs through liquidations of US treasury holdings demonstrates of the growing US dollar liquidity shortages of the Philippine financial system.

Has USD php 50 Been the BSP’s Maginot Line? Why the Peso Will Fall Further

Yet the BSP’s GIR conditions showed that it sold significant US dollars in support of the peso.

And the BSP’s GIRs also revealed of substantial leveraged exposure in the US dollar or the “US dollar shorts”.

And part of the $2 billion bond offering this week will likely be used again to shore up GIR. Again, another “US dollar short”.

Borrowed US dollars would have to be paid back. And should the policy of credit inflation be sustained, then this should lower the exchange rate value of the local currency. Hence, it would require more domestic currency to buy US dollars. So access to US dollars will become increasingly costly. More than this, even hedging costs on US dollar will rise, so artificial “reserves” eventually will have to fall.

I suspect that the USD php 50 has accounted for the BSP’s Maginot line. Each time the USD peso hit the 50 level, the BSP may have intervened by selling waves of USD.

Like China’s PBoC, the BSP seems caught in a predicament. The BSP has been faced with a Hobson’s choice; either let the peso fall and maintain GIR levels, or support the peso and suffer the GIRs. Something will have to give.

In the present political economic environment where governments, supported by the populism, believe in free lunches or cost free political redistribution, the global US dollar short position will compound or aggravate on internal dynamics

This applies to the Philippines.

This is why I believe that the USD peso will eventually break the 50 level. And even more, the USD php will go on to breach the 2004 high of 56.45 in the fullness of time. It may be this year or it may be next.

All of which depends on the degree of inflationism, and the rate or scale of deterioration of domestic balance sheets of the government and of the banking system. And how such local dynamics will playout in face of the US dollar shorts, or at worst, a global crisis

It’s gonna be a very interesting year.

It’s a year that will likely catch most people off balance.

And don’t forget surveys have recently been exposed as mortally wrong (e.g. Brexit, Trump presidency)

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

The Skyscraper Index offers an opportunity to look inside at the business cycle in action. Artificially low interest rates stimulate the demand for land, especially in central business districts. Higher land prices create an incentive to build taller buildings, and taller buildings require new technologies in building systems, such as air conditioning, plumbing, and elevators, as well as new building technologies such as lifting cranes and cement pumpers. Such processes permeate throughout the economy, not just skyscrapers. In this manner you see how central bank policy can have pervasive negative effects throughout the building as well as throughout the economy—Professor Mark Thornton

In this issue

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

-Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

-Emergent Divergences Exposes More Cracks on the Property Bubble!

-Expect GDP Week Volatility 

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

Trust not to appearances

Ne fronti crede “Trust not to appearances”—signifies a maxim attributed to the Roman poet Virgil (Publius Vergilius Maro)

Ne fronti crede can be applied to what’s going on in the Philippine financial markets.

For instance, the PSEi closed this week down by only .08%. While such largely insignificant number has accounted for a second straight week of seeming placid weekly performance for the headline index, it’s also the second week where internal volatility has been camouflaged by engineered attempts to cosmetically spruce up the Phisix.

Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

First and foremost, end session pumps and dumps again punctuated this week’s enhanced but ensconced volatility. Pumping contributed 18.79 points or +.26%, while dumping delivered 46.34 points or -.64% of the week’s outcome. In all, the PSEi 30 gyrated by .9% over the past week mostly from a two session pump and dump!

All actions have consequences. As incessantly explained here, while price fixing has been portrayed as a legitimate function out of technical reasons (specific volume required in defining “marking the close”), such convolutes the price coordination mechanism that works to foster imbalances. And market distortions have not been limited to the absurd mispricing of equity securities, but as prices, they project false signals into the economy.

Such false signals unduly and undeservingly nourish and feed on economic maladjustments—specifically the frenzied contest to seize market share through unbridled supply side expansion financed by credit.

Next, symptoms of divergences seem to have reemerged in this week’s trading session. 

 

  

The property sector, which astonishingly zoomed by 2.52% and partly helped by the service sector which was up 1.33%, essentially negated losses by industrials (-1.71%), finance (-1.27%) and holding (-.18%) sectors for the PSEi to close almost neutral.

The service sector’s rise was principally due to TEL’s +1.76. This emerged as losses of the lesser significant market caps GLO (-1.06%) and ICT (-1.66%) had been eclipsed by TEL’s gains

Of the PSEi 30 basket, 2.33 issues declined for every issue that rose. The skewness of the distribution of price changes can be seen in the upper right window.

An incredible THREE of the top 5 issues, which accounted for 40.09% of the PSEi’s market cap were up 2.5% and above. Or the average weekly return for the 40% of the PSEi’s market cap, or the top 5, was at 1.47%!!!

Meanwhile, since the top 15 of the PSEi basket accounted for 80.73% of the index market cap weighting, theaverage return for the top 15 collapsed to a NEGATIVE .29%. This means losses by most overrun gains of the top 5 based on the average.

Applied to the entire index, the average return dropped to a NEGATIVE .51%.

Essentially, because of the highly skewed market cap weighting system, SMPH, ALI and JGS neutralized the performance of the entire index!

That’s how the index can be or has been gamed or manipulated.

Nevertheless, the headline index, or its components, wanted to take profits, but invisible forces decided to repeal the laws of economics by virtue of selective or targeted asset pumping and price fixing!

Emergent Divergences Exposes More Cracks on the Property Bubble!

My initial impression to the panic bidding on property issues was to suspect some refreshing news in the industry. But seen from the overall performance of the sector, particularly from the 7 largest market cap, which comprised 95.64% of the property sector’s market cap (as of January 20), that’s hardly the perspective.

That’s because not only has the gains been limited to two of the biggest market weighted firms, in specific, SMPH and ALI, the other two much lesser PSEi market weighted property firms went into the opposite direction! Or, MEG and RLC suffered enormous losses -1.32% and -3.27% respectively!

Meanwhile, FLI was down -1.8% for the week, whereas DD and VLL were unchanged. In short, such vicious gains were restricted to only two of the biggest property firms!

Even more, divergent outcomes can be seen in the price trends of the components of the property index. The chart on the lower right reveals of the shocking disparity between record setting SMPH (blue) compared to the rest, all of which have been strenuously recovering from their December lows. Only DD has so far outperformed.

It remains to be seen whether momentum and leadership by SMPH will succeed, in the interim, to pull out her peers out of the morass. Or, if the underperformance of the industry will eventually weigh on SMPH.

Fascinatingly, last week I noted of the observation by Global Property Guide that high end residential property prices has been suffering from downside pressures: “In The Philippines, the average price of 3-bedroom condominium units in Makati CBD fell by 5.14% during the year to Q3 2016, in sharp contrast with y-o-y increases of 5.41% during the same period last year. Housing prices dropped 1.15% q-o-q during Q3 2016.” (Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017

 

Data from the Bank for International Settlements has corroborated GPG’s findings.

3Q residential commercial nominal property prices (flats) in Makati plunged into negative territory (-2.99%) as shown in the upper left pane! BIS data here.

HIGH end user or consumer property prices have been in a sharp decline for the SIXTH consecutive quarter or from year end of 2015!

Paradoxically, the sharp fall has occurred even as the BSP launched a secret/silent Php 200 billion bond buying stimulus in the 1Q of 2016! In short, the BSP’s action has, so far, failed to reignite demand for end user properties.

Instead, it has been commercial land prices that have been energized by the BSP. Makati commercial land prices vaulted 24.78% in the 3Q 2016 (see upper right window)! In 2Q, the growth rate was 20.44%! That’s two quarters of 20% growth rate. BIS data here.

Makati commercial land prices troughed in the 3Q of 2015 and recovered (V-shaped) sharply coincidental when the BSP begun its stimulus in 4Q 2015 and greatly expanded this 1Q 2016.

Surging commercial land prices suggests that property developers and mall operators have been in a bidding frenzy to acquire properties for future inventories!

So while faltering prices suggest of relatively weaker demand to supply, property developers have engaged in a fierce competition to acquire land for future development! 

In short, such dynamics represents a splendid manifestation of the discoordination between demand and supply! The outcome of which will be to ramp up credit financed overcapacity!

Of course, all these have transpired as credit expansion continues to rocket!

The banking system’s loans to the property sector in the 3Q registered a blistering 19.16%! Though this has been lower than in the 1Q’s +23%, the pace of growth seems to be picking up anew (see lower left pane).

Yet the torrid pace of credit growth in the property sector has landed the Philippines in second place, after Mexico, in IMF’s 2Q “real credit growth over the past year” data for the world!

And here’s more. To reiterate, since falling prices means demand for high end properties has been overshadowed by supply, yet supply continues to roll unabated!

Proof?

The Philippines even captured the world ranking, fifth in terms of global skyscraper output for 2016 (lower right window)!  From Quartz.com: “In 2016 the world saw the completion of 128 skyscrapers, up from 114 in 2015, according to the US-based Council on Tall Buildings and Urban Habitat (it defines a skyscraper as being higher than 200 m, or 656 ft).” 

Such developments remind me of the “skyscraper curse”, see infographics from Visual Capitalist).

Skyscrapers can function as key symptoms of the business cycle in progress or “they are simply a very visible manifestation of the business cycle phenomenon brought about by artificially low interest rates.”* (Boyle, Engelhardt and Thornton 2016)

Additionally, like any malinvestments, they are caused by false price signals: “Skyscraper Curse would arise if the same psychological factors that lead to overvaluation in asset markets also lead to skyscraper construction”. Hence, skyscrapers can serve as a useful indicator of boom bust cycles. Or skyscrapers may symbolize “monument to the successes of the past and as a harbinger of the suffering that is to come.”

Interestingly, the deluge of supply of skyscrapers has simultaneously emerged in ASEAN majors, particularly Indonesia, Philippines, Malaysia, Singapore and Thailand.

*Elizabeth Boyle, Lucas Engelhardt, and Mark Thornton Is There Such a Thing As a Skyscraper Curse? The Quarterly Journal of Austrian Economics (2016)

 

As a final observation, even from the government’s own GDP data (3Q or first 9 nine months), the combined share of retail, real estate and construction to NGDP has been rapidly growing to account for nearly 40% (left window). 

The same industries accounted for 38.3% share of loans from the banking system as of November 2016. Real estate loans may be inaccurately reported due to the BSP’s regulatory caps.

Yet such is a clarion sign of mounting concentration risks!

The above excludes the banking share of NGDP and banking loans. Banks, after all, are the chief financiers of the present bubble!

This only reveals that such awesome price bidding frenzy on select property equity prices comes in the face of ballooning risks!

Expect GDP Week Volatility

By the way, the Philippine government is slated to announce 2016 GDP next week. GDP week has almost always been accompanied by pre-GDP volatility (mostly massive pumping see right window).

Since 2015, in 6 occasions the PSEi has been frantically pushed up 2-3 days prior to the announcement. If I am not mistaken, last week’s pump could be a precursor to the coming week.

Yet not all has been about pumping. There was a GDP week dump in 2015 when 2Q GDP was reported at 5.6% and 1H GDP at 5.3%. There was also a bizarre insouciance in 2Q 2016, even when GDP was reported at 7.0% 2Q and 6.9%1H! Could it be that there was no insider tip for the 2Q 2016???

So yes, expect GDP to serve as classical conditioning for the Pavlov dogs to wildly go on a pumping spree!