Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few, gold has been the asset of last resort.—Anthony C. Sutton

Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Back in 2016, I cited the Bangko Sentral ng Pilipinas (BSP) as one of the principal reasons why the war on mining will fail. [Why the War on Mining Will Fail! June 26, 2016]

“Of course, another reason why mining won’t likely be totally banned is because the Bangko Sentral ng Pilipinas not only buys gold from the miners (even illegal miners), they get revenues from sales to them!

“So I expect the BSP to oppose a total ban.

Last week, the political leadership enacted the BSP’s Gold Bill!

From the BSP: (bold added)

The BSP today announced that Republic Act (RA) No. 11256, An Act to Strengthen the Country’s Gross International Reserves (GIR), was approved by Congress and signed by President Rodrigo R. Duterte last 29 March 2019.

The new law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. The measure also covers the sale of gold by small-scale miners to accredited traders for the eventual disposal to the central bank.

R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases from more than 900 thousand fine troy ounces (FTO) in 2010 to around 10 thousand FTO in 2019 as a result of the taxation of the sale of gold to the BSP beginning July 2011. 

The tax regime under R.A. No. 11256 would allow the BSP to increase its purchases of domestic gold to further build up the level of the Philippines’ GIR, which serves as the country’s primary buffer against external economic shocks. An increase in BSP’s gold purchases using pesos leads to a net increase in the GIR, thereby improving the country’s economic standing and lowering the cost of both funding for the Republic as well as doing business for the private sector. It also prevents the smuggling of Philippine gold through the black market to other countries and allows small-scale miners and traders to sell gold at international market prices.

So the BSP (and the leadership) admitted to the following:

First, the domestic mining industry IS the primary source of gold for the BSP, which it uses to manage its balance sheet.

Second, the massive backlash of excise taxes on the industry, and thus its UTTER failure!

This excerpt signifies an awesome confessional: “R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases…a result of the taxation of the sale of gold to the BSP beginning July 2011.” 

Back in August 2012, I wrote… [Philippine Informal Gold Mining Industry Booms, August 24, 2012]

The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier, according to the latest government data. By law, all gold produced by miners such as Mulato in the Philippines should be sold to the central bank at around world market prices.

It has been an accelerating trend over the past year. The data shows central bank gold purchases dropped an annual 4 percent, 76 percent and 88 percent in the second, third, and fourth quarters of 2011, respectively. It fell 92 percent in the first quarter.

Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.

For authorities, it would be better to “police” than to waive taxes. This assumes that smuggling or the informal sector will be curtailed by mere regulatory enforcement, yet the above already demonstrates their helplessness: note the phrase “become so overwhelming it can do little about the smuggling”

Doing the same things over and over but expecting different results has been the entrenched characteristic of politics. The essence of politics is symbolism. The impression to “do something” are actually meant to generate votes.

In reality, the purported political path to “police” gives political authorities a share in the the profits. Possibly to finance coming elections?

(bold italics added)

It took the BSP eight long years to realize the might or power of the law of demand on the economy, “if you tax something, you get less of it”!

Such is an example of the complete failure of “statistics is economics”!

Lastly, the political institutions (war on mining) have failed to control or suppress the black market, which has been the primary channel for small-scale mining activities, and subsequently, the conduit for smuggling!

Again in 2012, I wrote: [Philippine Mining Index: Will The Divergences Last?  August 13, 2012] (bold italics added)

In reality, environmental preservation and optimizing revenues from the mining industry are strongly associated with theresource curse dilemma, that which is the politicization of the resource industry.

Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance, insecure property rights and involuntary exchanges or the intense politicization of the industry.

So the BSP and the political leadership has VALIDATED my predictions!

Well, for the BSP, it may not be all about GIRs or “improving the country’s economic standing and lowering the cost of funding”.

Figure 1, World Gold Council

Global Central Banks buying of gold hit a record high in 1Q 2019.

From the Financial Times (May 2): [bold added]

The central banks of Russia and China helped drive a 7 per cent increase in global gold demand in the first quarter from a year earlier, according to the World Gold Council, as they continued efforts to trim their exposure to US dollars.

Central banks purchased a total of 145.5 tonnes of gold worth about $6bn, an increase of 68 per cent compared with last year and the strongest first quarter since 2013, the industry-led body said.

Russia was the biggest buyer during the period, adding 55.3 tonnes of the yellow metal to tilt the composition of its reserves away from the US dollar, amid rising tensions with Washington and the prospect of further sanctions. China added 33 tonnes to its holdings and Ecuador bought gold for the first time since 2014, said the WGC.

There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure, or in the case of Russia there are potential implications for FX reserve management if they become subject to sanction risk,” said Alistair Hewitt, a director at the WGC.

Last year central banks bought more gold than at any time since the end of the gold standard in 1971, led by Russia and Kazakhstan.

Still, the WGC data show that purchases have started to slow from last year. In the third quarter of 2018 central banks bought a total of 253 tonnes of gold, and 165.6 tonnes in the fourth quarter.

Overall gold demand also fell 17 per cent from the fourth quarter of 2018, said the WGC.

The BSP may have been influenced by emerging market central bank trend of partly diversifying its reserves assets.

It could also be about hedging reserves against the risks of a financial calamity.

Figure 2, World Gold Council

It may also be in response to the snowballing geopolitics of de-globalization as evidenced by the increased usage of economic sanctions and trade wars where gold may serve as safe-haven assets for central banks.

It may even be about emerging markets veering away from the US dollar standard to elude the hegemonic grip of US financial institutions and geopolitical intrusions.

It could even be related to financial asset collaterals used in the offshore US dollar (Eurodollar) markets.

Figure 3

In reality, based on the WGC’s data, the BSP’s gold reserves have been stagnant since 2011.

So the BSP’s Gold Bill must be about preparations to accumulate gold reserves and or designed to CENTRALIZE domestic gold trade for either tax purposes (formal gold enterprises) or to manage gold flows.

Figure 4 (Gold Price)

Because of the market mayhem late last year, gold prices surged to record highs against 72 currencies in January 2019.

Gold prices continue to soar against the Indonesian rupiah and Indian rupee, as examples.

Well, gold prices in Philippine pesos, reveals a similar dynamic as it approaches its 2011 apex.

So has the BSP been anticipating the record gold prices in pesos too for it to push the Gold Bill?

With the BSP’s Gold Bill highlighting the culmination of the absurd war on mining, expect that the next political move on the industry to be about liberalization.

Tax issues will impel the National Government to liberalize the industry.

The alcohol prohibition was repealed by US President Franklin Delano Roosevelt in 1933, hardly because of its social side effects but because the government wanted to generate financing in the face of the great depression.

As Professor Donald J. Boudreaux wrote,

And a House leader of Congress' successful attempt to propose the Prohibition-ending 21st Amendment said in 1934 that "if (anti-prohibitionists) had not had the opportunity of using that argument, that repeal meant needed revenue for our government, we would not have had repeal for at least 10 years."

There's no doubt that widespread understanding of Prohibition's futility and of its ugly, unintended side-effects made it easier for Congress to repeal the 18th Amendment. But these public sentiments were insufficient, by themselves, to end the war on alcohol.

Ending it required a gargantuan revenue shock -- to the U.S. Treasury.

From this premise, I shall make a prediction.

When the real economy falters, the government will liberalize the mining sector!

(bold original)

The Era of Easy Money is OVER! President Duterte Confirmed This With “The Economy Is In Doldrums”  June 24, 2018

Attachments area

Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

The reserve requirement, which was once intended to give liquidity, has largely lost its original significance but has grown in importance as the only, if feeble, check on indefinite currency expansion. It has prevented commercial banks from rushing with our economy down a steep place into the sea, but it has been far from exorcising the evil spirit of inflation. As time has gone on, a steady reduction of reserves has proved feasible, without invoking immediate disaster, and the denial of a roving license to the banks has thus been compensated by the gift of privateers' letters of marque—Frank D. Graham

In this issue

Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

-RRR and Policy Cuts: BSP’s Launches Rescue of the Banking System!

-What’s the Source of the Interest Income Boom?

-Answer: Bond Boom Spiked Financial Asset Investments!

-Booming Bonds Plus T-Bill Yields at Multi-Year Highs Equals Inverted Treasury Curve

-Bank Panic Borrowing and Stumbling Deposit Liabilities Persists!

-Will RRR and Interest Rate Cuts Boost Shares of Listed Banks?

Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

RRR and Policy Cuts: BSP’s Launches Rescue of the Banking System!

The newly appointed BSP Chief barely warmed his seat, last March, when he called for the central bank to immediately ease monetary conditions by cutting the overnight lending rates and by reducing the Banking system’s reserve requirement ratio (RRR) up to 400 basis points (4%). The issue was about “timing”, the Chief said.

And perhaps the right “timing” has arrived. It took two events, the unexpected decline of the GDP, which prompted a cut in official policy rates, and perhaps last week’s stock market meltdown led by Banks that incited the BSP’s “bold move” of chopping RRRs aggressively, which were both cheered by bank officials.  At the PSE, the financial index rallied 2.25% on Friday, a likely response to the RRR cuts. 

The 2019 RRR cuts will be implemented in 3-months on a staggered basis on ‘reservable liabilities of universal and commercial banks’ only.

The first adjustment, a 100 basis point (1%) reduction, will apply on May 31, the next 50 basis point (.5%) decrease on June 28th, and the last 50 basis point (.5%) cut on July 26th.

The stated objectives of the RRR cuts, according to the BSP are “to help mitigate any tightness in domestic liquidityconditions due to limited public expenditure following the budget impasse in the first quarter of the year” and “to promote a more efficient financial system by lowering financial intermediation costs”. (bold added)

To recall, the BSP cut RRRs in March, “to help mobilize liquidity in support of economic activity as well as capital market development over the medium term” and in June “to promote a more efficient financial system by lowering intermediation costs”. The BSP noted then that RRR cuts were not intended to signal changes in policy: “the calibrated reductions in reserve requirement ratios are not intended to signal any change in the prevailing monetary policy stance, as the BSP continues to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations. Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will in turn continue to depend primarily on the BSP’s outlook for inflation as informed by economic data”.

In sum, RRR cuts were intended to primarily ease liquidity conditions, which consequently, would translate to the lowering of intermediation costs. And these are not meant to signal changes in policy?

Of course, the May 9 cut in the BSP’s official policy rates render this moot and academic. And the reason for this, from the BSP: “In deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program. In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring.”

Wasn’t household spending the savior of 1Q GDP?

The BSP has, once again, launched a massive rescue of the Banking System sugarcoated as liquidity management, economic support and reducing bank intermediation costs.

What’s the Source of the Interest Income Boom?

But if the BSP had indeed been data-dependent, the banking system’s 1Q stand out performance requires hardly any support from the BSP.

Figure 1

The Philippine banking system reported a phenomenal surge 28.5% surge in profits in the 1Q, the best showing since the 3Q of 2013! (Figure 1, lowest window)

Interest income boomed by an astounding 48% but interest expenses almost doubled by 96.2%! With non-interest income also soaring by 20.2%, mainly from the 26.05% surge in fees and commissions, the banking system’s operating income rocketed by 29.2%! (figure 1, upper window)

Say what? Such splendid headline data is a sign of tight liquidity conditions??? Why then did the BSP ease monetary conditions and rescue the industry when ‘tightness’ did them a favor???

What component/s of the banking system’s asset-base has delivered a majestic boom in interest income?

Bank Loans? Cant’ Be. The downshift in the banking system’s loan portfolio seems to be accelerating. March’s Total Loan Portfolio (TLP) growth inclusive of InterBank Lending (IBL) and Reverse Repurchase (RRPs) stumbled to 11.28% in March, the lowest since July 2013, from 12.6% in February, 12.62% in January and 13.9% in December 2018. (figure 1, middle window)

Gross Interest Margins have been crashing too. With the fantastic surge in interest expense, interest margins have tumbled to 2011 levels. Gross Interest Margins in March was at 67.38%, materially down from 73.01% in February and 74.42% in January. (figure 1, lowest window)

Answer: Bond Boom Spiked Financial Asset Investments!

Figure 2

One of the world’s best performing bonds, Philippine treasury bonds, which blew away its peers in Q1 2019, may have been the key.

Accumulated gains of the Banking System’s Financial Assets (portfolio investments) more than doubled up 275% in March to Php 8.5 billion, the first profit since January 2018 and was higher by 79.73% in February but was down 145.8% in January 2019. (figure 2, upper window)

If banks were generating an explosion of profits from the bond boom, then the incentive to hide losses to Held to Maturity (HTM) assets must have been reduced. Banks would then trade their surging assets to generate income and liquidity.

But this scenario has barely been unfolding.

While it may be true that the growth in HTM assets have somewhat slowed (+27.37% in March, +26.52% in February and +32.73% in January compared to the 50%+ growth during the last four months of 2018), its pace of growth has still been commanding. Nevertheless, its share of gross Financial Assets slid to 67.17% from the high of 70.94% in September 2018. In its stead had been the increase in the share weights of Held for Trading Assets (HFT) and Available for Sale (AFS). (figure 2, lower pane)

Booming Bonds Plus T-Bill Yields at Multi-Year Highs Equals Inverted Treasury Curve

With bond yields falling, financial liquidity should have been easing. But it hasn’t. That’s because T-Bill rates have been stubbornly loitering at multi-year highs despite the announced RRR and policy rate cuts. (figure 3 upper window)

Figure 3

The ramification of which has been to crash the Treasury yield curve which caused an inversion. The 10-year/3-month and 6-month curves have flattened in April, from an inversion in March, the first ever since at least 2001! (figure 3, middle window)

Meanwhile, the Financial Asset boom has spiked the BSP’s liquidity ratios. Liquid assets to deposits ratio soared even as the banking system’s cash reserve to deposits ratio generated only marginal gains.

After falling to a three-year growth low of 9.9% in February, cash and due banks increased by 10.99% in March. (figure 3, lowest window)

Bank Panic Borrowing and Stumbling Deposit Liabilities Persists!

Figure 4

You see, should banks continue to rely on bonds and LTNCDs for its funding the objective of the lowering of intermediation costs won’t be attained.

Banks continue to panic borrow in March, with bills payable growing at a sizzling pace of 49.92%, 31.96% and 26.06% in March, February and January 2019. Bonds payable surged 134.97%, 163.1%, and 142.1%, over the same period. [figure 4, upper window]

As such, bank funding costs have spiked to March 2013 levels! [figure 4, middle window]

That bond boom has provided leeway for the Banks to report a drop in published NPLs. [figure 4, lower window]

Figure 5

The BSP Chief, an economist, cannot seem to fathom that his pet project aimed at hitting record deficits from massive surges in public spending through “build, build and build” will force banks to compete with National Government for access to savings.  

Aside from undeclared NPLs, competition for access to public savings, which should sop up liquidity, continues to crash the rate of growth of deposit liabilities.

Deposit liabilities growth fell to 6.11% in March, the lowest rate since November 2012, from 6.25% in February and from 6.91% in January. That’s mainly because peso deposits tumbled to 6.37%, a September 2012 low from 6.89% and 7.74%, over the same period. Meanwhile, foreign currency deposits recovered 4.87% from 3.21% and 3.01% over the last 3-months as the peso rallied. (figure 5, upper window)

Total bank loans, total deposit liabilities, and M3 have been in chorus. That’s the liquidity tightness the BSP has been talking about vaguely. (figure 5, middle window)

Please remember, the dramatic tightening occurred even as the BSP cut RRR rates in 2018. The difference today has been that RRR cuts come along with policy rate cuts compared to increases last year.

In short, published objectives of RRR cuts of easing liquidity and the lowering costs have NOT been attained so far.Perhaps, the dosage has been too light, so a doubling down is required.

If the markets respond to the BSP’s easing by recharging growth of the banking system’s loan portfolio, an energized CPI should likewise lift bond yields, thereby wiping off the bond boom that brought upon 1Q profits and whatever liquidity it generated then!

RRR cuts free up resources or financing of the banking system from regulatory shackles. (figure 5 lowest window)

The BSP has admitted to what I have been saying all along; these are designed to plug the liquidity vortex plaguing the banking system.

Unfortunately, these signify a critical issue on the health of the banking system that hardly any establishment expert has ever spoken about or dealt with.

Also, it hasn’t been about the stimulus previously peddled by media.

The BSP’s policy rate cuts involve forcing down of interest rates which have been hoped to spur lending and reduce debt servicing costs, thereby reinvigorate the statistical economy, the GDP and subsequently, boost tax revenues.

Regrettably, the BSP hasn’t learned the lessons of its contemporaries. If balance sheets of both lenders and borrowers have been stuffed with burdensome amounts of debt or leveraging, there should be lesser demand for credit. Haven’t the BSP heard of Negative Interest Rates, like that of our neighbor Japan?

And if these BSP rescues won’t perk up lending, not even ‘build, build and build’ will have ample access to cheap financing. That’s unless the BSP accelerates its nuclear option of printing money that should smatter the peso aground.

Will RRR and Interest Rate Cuts Boost Shares of Listed Banks?

Figure 6

Despite tight monetary conditions, listed banks had a field day in terms of net income growth in the 1Q 2019. (figure 6 upper window)

Net income for all banks rose 19.36% or by Php 6.0 billion.

The Financial index registered an increase of 19.29% or a Php 5.6 billion marginal net income growth. PSEi banks posted 24.08% or higher by Php 5.016 billion.

The biggest beneficiary of the 1Q 2019 financial asset boom was no other than BDO. BDO net income growth jumped 66.1% or was higher by Php 3.9 billion constituting 64.6% of the marginal net income growth of all banks, 69.8% of the Financial index and 77.34% of PSEi Banks.

The right column shows the gross interest rate margins of banks. China Bank (25.9%), PBC (24%), UnionBank (-21.4%), and Philippine Trust (22.94%) as the banks that registered the most significant interest margin declines in 1Q 2019.

Not even the massive pumping of the index has elevated bank stocks out of the woods. The massive 2.25% surge of the Financial Index shaved the week’s loss to 2.19%.

If history should rhyme, RRR cuts have done little to help bank health conditions and share prices. (figure 6 lower left window) Banks have been pulling down the headline index.

Also, the backlash from unfettered manipulations should become apparent soon. (figure 6 lower right window)