Despite The Impressive September Government Revenue Growth, 2017’s 9-Month Fiscal Deficit Runs Nose-to-Nose with 2016’s Performance

The National Government’s (NG) revenue growth for the month of September was impressive!

 

General Revenues (tax and non-tax) soared 20.57%. Tax revenues (BIR + Bureau of Customs) jumped 24.18% on the back of BIR’s 25.16% and Bureau of Customs’ 20.81% scintillating numbers for the month. 2017 was the best September performance since 2014 (upper pane).

In the 3Q, September’s activities pulled revenue collection growth (+14.54%) to the third highest in 9 years after 2013 (+19.29%) and 2014 (+15.03%).

Even with the magnificent 3Q lift, over the 9 months period (+9.4%), 2017 trailed the years of 2011 through 2015, which posted a median growth of 12.63%.

It is worth repeating that the revenue outperformance in the 3Q by 2013 and 2014 coincided with sizzling hot M3 growth of 30%+++.

 

And it is not surprising to see the same dynamics at work again.

The difference has been that in 2013-2014, M3 was powered solely by bank credit. Thus M3 lagged bank credit growth.

Today, M3 has been energized by BOTH Net claims on the central government (QE) and by banking lending. Hence, it would appear that NG revenues have risen synchronically with bank credit (upper pane) and with M3 (domestic liquidity)

As one would note, to spike revenues for the government, the BSP’s emergency or ICU measures have been used to boost NGDP. Or, the BSP used zero bound rates as means for inflation targeting.

Boosting NGDP not only signify a subsidy for the NG; it also projects a strong GDP for publicity purposes.

But the costs of these policies are:

1) economic growth has been frontloaded or has borrowed from the future,

2) resources have been misdirected to capital consumption activities

3) balance sheets have increasingly become leveraged and

4) the purchasing power of the citizenry shrinks from the continuing invisible transfers to the government and to bank borrowers 

So far that was the good news.

Though September expenditures contracted by a measly 1.78%, the enormous jump in revenues still wasn’t able to solve the deficit problem.  

2017’s deficit of Php 36.892 billion was the second largest in 10 years after last year’s Php 75.327 billion.

2017’s 9-month deficit of Php 213.066 billion has run nose-to-nose with 2016’s Php 213.703 billion with just a difference of Php 637 million!

2009 and 2010s deficit were more about the Great Recession’s spillover effects (mostly relatively weaker revenues than today), hence vastly differs from current conditions.

Understand here (again) that the government through the BSP has employed emergency measures to obtain revenue 20%+ growth by spiking NGDP, which as shown in 2013 and 2014, had been unsustainable.

What would happen if the rate of revenue growth can’t keep with the pace of rate of government spending growth??? Will government borrow to finance these??? Or will it keep monetizing NG’s debt to ensure the overabundance liquidity, and to create the façade of having less NG debt??? Or will it be a combination of both?

Present actions of the USD peso suggest that the NG and the BSP have opted for the inflationary (debt monetization) path.

The USD-PHP Hits Fresh 11 Year Highs! The Balance of Payment Has Hardly Been the Culprit; Sssh, It’s About…. (Secret!)

The USD-Philippine peso broke into a fresh 11-year high at 51.53 Thursday, before closing the week below the breakout point.

Fascinatingly, because it rose by a skimpy .12%, the peso was one of the best performing Asian currencies as the US strengthened against most Asian currencies this week.

Media and by their favorite mainstream experts have frequently stated that the infirmities manifested by the peso have not signified a weakness at all.  Instead, such is a reflection of underlying strength expressed through Balance of Payment conditions (deficits). 

Satisfying ‘domestic demand’ through trade deficits is a sign of strength, so it is held.

In short, trade and current account deficits are blessing in disguise!

The Balance of Payments (BoP) defined as the current account and the capital account, represents an accounting summary of an economy’s transactions with the rest of the world for a specified time period.

The current account, defined as the sum of the balance of trade (goods and services exports lessimports), net income from abroad and net current transfers, represents the difference between nation’s net savings and investment. A country is a net lender to the world when it posts a current account surplus. On the other hand, a country is a net borrower from the world when it registers a current account deficit.

The capital account, on the other hand, defined as foreign direct investment (FDI), portfolio and other investments, plus changes in the reserve account, signifies the net change in physical or financial asset ownership for a nation

Theoretically, the Balance of Payments should balance or show a net figure of zero. That would be because current account deficits will have been offset by capital surpluses and vice versa.

During the gold standard, flows in gold functioned as a natural financial and economic anchor to keep BoPs in “balance” or in equilibrium.

The international gold standard wrote Austrian economist Murray Rothbard*, provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium. [*Murray N Rothbard The Monetary Breakdown of the West Mises.org]

Today, under fiat monetary system, a crisis may emerge out of severe imbalances in the Balance of Payments conditions.

Notes the Wikipedia: (bold mine)

A BoP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth. However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds. The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency. This causes issues for firms of the affected nation who have received the inbound investments and loans, as the revenue of those firms is typically mostly derived domestically but their debts are often denominated in a reserve currency. Once the nation's government has exhausted its foreign reserves trying to support the value of the domestic currency, its policy options are very limited. It can raise its interest rates to try to prevent further declines in the value of its currency, but while this can help those with debts denominated in foreign currencies, it generally further depresses the local economy

In short, the BoP can serve as a barometer for boom-bust cycles.

By the way, September BoP turned to a USD $24 million surplus.

 

The Philippine balance of payment and the USD peso have so far had little correlations.

The USD peso rose when the BOP had been in neutral or close to neutral (2000-2004) and even during periods when surpluses were substantial (2007-2008, 2013 and 2015). Conditions underlying these periods varied. 2000-2004 signified the epoch of rebalancing post-Asian Crisis, 2007-2008 represented external shocks and 2013-2015 could be the peak of the Philippine boom which had been rattled by the Taper tantrum.

Exports are the price paid for imports. Imports signify as the key benefits of trade. That's the theory.

 

But in the Philippines, fiscal policy plays a material role in determining the trade conditions

The nominal fiscal deficit coincided with the USD peso movements in 1998-2007.

When the fiscal deficit peaked in 2002, this coincided with climaxing of the trade deficit in the same year (shown both in nominal and % of GDP lower right).  With a time lag, the USD PHP climbed to its zenith in 2004.

When the trade balance and the fiscal deficit ebbed, the peso rallied.  During these days, the trade deficit was much a function of fiscal policy.

The opposite occurred in the post-Lehman period of 2009-2014. Fiscal deficits swooned, but trade deficits expanded.

Imports during this period would account for market forces rather than fiscal policy, thus signifying as the key benefits of trade.* One may argue justifiably that imports were about economic growth in this period. That would be because the private sector determined import activities.

* I’ll put aside here the influence of monetary policy.

But the mechanics changed in 2015 up to the present. Fiscal policy has once again played a crucial role in imports. The role of fiscal policy in shaping trade balance conditions has expanded in 2016 and the present. (lower right window) Thus, the crowding the effect from these political-economic actions will likely aggravate the US dollar shorts.

The greater the government spends, the more it influences the current account, the BoP and the Peso.

The purchasing power of money and the exchange rate is ultimately driven by the demand and supply. Thus, the demand and supply of the peso will operate relative to the demand and supply of the US dollar by Philippine residents.

Let us look at the supply side of the US dollar.

 

OFW remittances growth rates have pivoted lower since its peak in 2014. (middle window) The PSA’sapproved FDI continues to cascade in the 1H 2017. (upper right window) The BSP’s FDI flows have been up against the years prior to 2016 (July 2017), but debt constitutes a vast majority of these (upper left). Debt accounts for more US dollar shorts.

Growth rates in Gross International Reserves have become negative since February of 2017. Nominal foreign portfolio flows remain negative in the 9-months of 2017.

The establishment has now succumbed to the idea of lower growth rates for the BPO industry which they see at less than 10% this year and would taper off the coming years.

In short, US dollar supply will be scarce RELATIVE to the peso.

And to scare off peso bears, the BSP recently announced the renewal of foreign currency swaps with the Bank of Japan and with the central banks of ASEAN.

Even more, private sector as seen in many listed companies continues to load up on foreign debt. [More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets September 10, 2017] This should increase future demand for US dollars.

Whether defined by Wikipedia or by the Austrian school, the BoP essentially will reflect on domestic inflationary policies.

 

The USD peso has had a tight correlation with the BSP’s undisclosed use of its nuclear option, especially from 2008 onwards. (upper window)

The USD peso began its steep descend in 2004 when the BSP scaled back from financing the National Government’s (NG) debt. 

When the Lehman crisis struck in 2008, the BSP used this emergency tool for a short period to stabilize the economy whereby the US peso responded with it by soaring to 50. When the BSP pulled back from NG debt subsidies in 2010 to 2013 the peso rallied strongly again.

The taper tantrum compelled the BSP to use this emergency tool again. The peso inflected and began to lose ground. When the BSP pulled back, money supply exploded as the private sector credit roared. The peso lost further ground. In 2015, the BSP decisively used the nuclear option as a regular tool. Thus, the misery of the peso has been sustained.

The mainstream may adamantly IGNORE this, but this has and IS the strongest of all forces to influence the peso.

Money supply has merely been responding to the banking system and or to the BSP’s efforts to shore up the NG.

With the NG rarin’ to spend, just how will they be able to finance such splurges once nominal prices fall? Two days ago, the Department of Budget and Management appealed to congress to raise wages of military personnel by 100%! That’s aside from more military hardware, build, build and build, free college, bigger bureaucracy and more free stuffs for special interest groups.

Moreover, the BSP has oriented the private sector to become hooked to debt.  And how will all these ever mushrooming malls, real estate projects, and hotels survive if money supply growth, pillared on debt, dawdles? And how will they generate revenues for this spendthrift government?

As I have been saying here, the BSP has been playing with fire. And play with fire we get burned. It would be less of the government who will get singed. It will rather be the average citizen, whose purchasing power will wretchedly shrivel.

Anytime a slowdown or stagflation comes to the fore, expect the peso’s downfall to accelerate.

Buy on dips the US dollar-php!