There’s always someone who is more willing to play the short-term game than you are. Someone who is willing to cut more corners, send a more urgent text, borrow against the future, ignore the side effects, abuse trust and corrupt the system–somehow justifying that short-term hustle with a rationalization (usually a selfish one) about how urgent it is. On the other hand… There’s plenty of room to win as someone who takes a longer view than the others—Seth Godin
Record GIRs Amidst Deflation in the Banking System FX Deposits, Booming Crossborder Credit Transactions and Derivatives!
-Record GIRs? Why the Deflation in the Banking System FX Deposits?
-US Dollar Standard: Despite Record GIR, BSP’s Bank Reserve Deposits and Currency Issuance Decouple!
-Trade Deficit and Manufacturing Recession Hardly US Dollar Flow Positive, Tourism Has Been Dollar Flow Positive!
-USD Flow Positive? October FDI Substantially Down, Portfolio Investments Reported Outflows in 2019
-Record GIR Equals Short USD: Financial Derivatives and Crossborder Credit Transaction Booms!
Record GIRs Amidst Deflation in the Banking System FX Deposits, Booming Crossborder Credit Transactions and Derivatives!
Is the Philippines truly awash with US dollar and other FX deposits?
From the BSP’s media entitled “End-December 2019 GIR Level Reaches an All-time High of US$88 Billion”: Preliminary data shows that the country’s gross international reserves (GIR) rose by US$1.63 billion to US$87.86 billion as of end-December 2019 from US$86.23 billion as of end-November 2019.1 The month-on-month increase in the GIR level reflects the inflows arising from the BSP’s foreign exchange operations and income from its investments abroad, and the National Government’s (NG) net foreign currency deposits. These inflows were offset partly, however, by outflows representing payments made by the NG on its foreign exchange obligations during the month in review.
Record GIRs? Why the Deflation in the Banking System FX Deposits?
Figure 1
In the first place, why has the GIRs parted ways with the FX deposits of the banking system?
FX deposits submerged by .19% in November, its first deflation since May 2013.
Here’s the backstory.
During the US Fed-induced taper tantrum days of 2013, when the GIR growth rate cascaded, FX deposits swelled. That’s because GIRs may have been disseminated by the BSP to the public then, which have found their way to the banking system and transformed into peso loans. The 10 straight months of seething 30% growth in money supply in 2013-2014, thusly, exhibited the ventilation of this “distribution effect”!
However, since peaking in 2014, the growth rate of the banking system’s FX deposits has steadily headed south.
Opposite to 2012-2014, the massive buildup of the BSP’s GIRs since September 2018 has emerged in the face of an accelerated plunge in FX deposits, which again posted its first deflation in 6.7 years. M3’s plunge in 2018 may have highlighted the “concentration effect”!
Have FX deposits of the banking system been diverted to bolster the NG’s foreign currency reserves?
In nominal terms, after hitting a low of USD 76.722 billion in July 2018, December GIR posted an all-time high of USD 87.9 billion last December, to surpass its previous record etched in September 2016 at USD 86.14 billion. In contrast to FX deposits, since hitting an apogee of Php 2.179 trillion in August, November deposits totaled Php 2.127, down 2.4% from its peak.
Have FX deposits plateaued or emitted signs of an inflection point? Will the BSP be eventually prompted to redistribute its reserves back to the banks?
The topmost chart in Figure 1 shows the relationship between FX deposits and GIRs. While the middle is the same, it incorporates M3, demonstrating the possible distribution effect of GIRs in 2013-2014, and its concentration effect from 2018 to 2019. The lowest chart illustrated the nominal values of both the GIR and FX deposits that exhibit a potential plateau on FX deposits.
US Dollar Standard: Despite Record GIR, BSP’s Bank Reserve Deposits and Currency Issuance Decouple!
Figure 2
Secondly, considering the de facto US dollar standard, whereby changes in the domestic money supply mainly from bank credit expansion has been implicitly anchored on US dollar reserves held by the BSP, since the nadir in the 3Q of 2018, growth of international reserves have spiked to decouple with bank reserves as the latter’s growth rate continues to fumble.
The BSP’s international reserves jumped 10.34% in November 2019, the highest rate since September 2016. Meanwhile, Reserve Deposits of Other Depository Corporations (ODC) deflated by 6.99% over the same period, marking a six consecutive month of decline. (Figure 2, topmost)
The BSP’s currency issue has likewise mirrored the ongoing divergence with international reserves. For the second straight month, currency issuance grew by over 9% (9.7% in November), the lowest since December 2015. (Figure 2, middle pane)
International Reserves constituted 87% of the BSP’s total assets, as of November. Such reserves have maintained a narrow range from 84% to 88% of the BSP’s assets since 2012, which has served as the implied anchor relative to the domestic currency. (Figure 2, lowest pane)
On the liability side, the ODC and currency issued appear to be on the path to trade places. While the ODC’s share continues to erode, gains of currency issued have replaced the former's losses. The ODC’s share of liabilities slid to 34.15% in November down from 34.6% a month back. The share of currency issued to total liabilities surged to 30.3%, its second-highest since December 2018’s 31.47%.
With the ample supply of USD reserves, theoretically, the banking system should be issuing more credit and domestic currency. But the diametric directions of these factors tell us that something has been amiss.
Trade Deficit and Manufacturing Recession Hardly US Dollar Flow Positive, Tourism Has Been Dollar Flow Positive!
Figure 3
Furthermore, economic performance provides subdued support to a USD positive flow.
Merchandise trade continues to register substantial trade deficits even with the contracting rate of change of imports, which stagnating exports have barely improved. (Figure 3, upmost pane)
With imports posting a negative rate of change for eight straight months through November, hearing claims that the statistical economy has outperformed in the 4Q is just incredible.
Not just imports, but industrial production has registered another substantial 5.8% decrease in November. Industrial production has posted 12-consecutive months of declines through November. The raw data shows that a recession had already engulfed the manufacturing sector. (Figure 3, middle pane)
But because we are supposed to be a service-oriented economy, the negative showing of manufacturing and imports are to be ignored, according to establishment wisdom.
Are physical goods not sold on consumer retail outlets, such as department stores, groceries, and others? How about the barbershops and salons? Don’t they consume powders, lotion, shampoo, nail polish, and more? How about the much-ballyhooed real estate sector? Are cement, steel, nails, marbles, veneer wood, paints, and more not used in construction and on the finishing of real estate projects?
All these have to be imported or manufactured, yes?
And with BPO’s downscaling on growth projections, should these be taken as signs of either growth or dollar positive?
Tourism may be one of few the bright spots for the USD reserves. In the ten months of 2019, arrivals growth nearly doubled in 2019 to 15.04%, bolstered by October arrivals up by 21.93%. (Figure 3, lowest pane)
USD Flow Positive? October FDI Substantially Down, Portfolio Investments Reported Outflows in 2019
Figure 4
Foreign direct investments have likewise pointed to a USD negative for the Balance of Payments. The BSP’s 10-month FDI have been down 32.8% in 2019 to USD 5.8 billion from USD 8.6 billion a year ago. (Figure 4, upper pane)
Also, foreign portfolio investments have registered a net outflow worth USD 1.89 billion for the entire 2019. (Figure 4, lowest pane)
As enumerated above, there hardly has been any USD positive flows from the real economy that would justify the recent record GIRs.
Record GIR Equals Short USD: Financial Derivatives and Crossborder Credit Transaction Booms!
Perhaps, internal operations by the BSP and the banking system may have magnified the statistical reserves.
Figure 5
Following the sharp decline of the Peso in 2018, the BSP has modestly careened away from using FX instruments in managing its international reserves.
As of December, the GIR’s FX component registered USD 2.8 billion in December 2019, down by over half or 52.05% from its zenith at USD 6.86 billion in October 2018 or 14 months ago. Still, such FX tools are at unmatched levels. (Figure 5, upmost pane)
As of November, in the BSP’s International Reserves and Foreign Currency Liquidity report, other reserve assets, constituting financial derivatives and loans to nonbank residents and others accounted for USD 6,982.78 million or about 8.0% of December GIR or 53% of the nominal gains from the October 2018 trough.
Nevertheless, the BSP’s Balance of Payment 3Q report showed us some clues on the other likely drivers: “Net inflows in the other investment account expanded by more than four times to reach US$935 million in Q3 2019, from US$228 million in the same period of the previous year. This was on the back of residents’ withdrawal of their currency and deposits abroad amounting to US$747 million (from net placements of US$633 million) and lower net availments of short-term loans of US$381 million (from US$720 million) extended by local banks to non-residents. In addition, local banks’ net availments of short-term loans from non-residents increased to US$1.2 billion from US$95 million in Q3 2018. Net inflows during the period were partly tempered by outflows stemming from resident corporates’ net repayment of trade credits and advances amounting to US$222 million (from net availments of US$1.1 billion) and net withdrawal of nonresidents’ currency and deposits in local banks amounting to US$116 million during the quarter from net placements of US$96 million in the same quarter last year” (bold mine)
Stunning, isn’t it? Despite the massive foreign exchange denominated short-term borrowing by local banks, their deposits continue to deplete! Where’d the money go?
And there’s more.
The record GIR must have also been a product of BSP and the financial system’s increasing leverage with the US banks.
US Banks Total liabilities payable to the Philippines have rocketed to multi-year highs in 2019, alongside the spike of the BSP’s GIR, which hit a record late 2019. Though not a record, vigorous activities have also been noted on the US bank's Total Claims on the Philippines.(Figure 5, middle and lowest window)
According to the US Treasury International Capital (TIC), “U.S. Banking Liabilities to Foreigners” comprise “Foreign holdings of most types of dollar-denominated short-term U.S. securities”. On the other hand, “Data on U.S. holdings of short-term foreign securities including securities held for banks' domestic customers”, adds the TIC, “are included with other claims in the monthly data on "U.S. Banking Claims on Foreigners”.
Needless to say, a substantial portion of gains of the record GIR, from its recent troughs have stemmed from cross-border credit transactions with US banks.
That said, financial derivatives, such as FX swaps, and massive cross-border credit transactions only increases the implicit USD short-positions of the domestic financial system, magnifying its vulnerability to sharp volatility in the financial markets.
Oh, add FDIs to such leveraging. Intercompany debt or debt to domestic affiliates comprised 73.75% of the 2019 10-month FDI, which doesn’t mechanically entail investments on productive capacity.
Record GIRs don’t seem to exhibit the abundance of foreign exchange holdings, instead like stocks, internal operations appear to have been designed to embellish or facelift superficially the nation's macroeconomic picture.
Brought about by the big bond boom, and the rallying ASEAN currency, that 2019 luck on the Peso seems bound to reverse in 2020. The 3.7% annual gains of the peso in 2019 came in the light of its neighbors, the Indonesia rupiah 3.64%, the Thailand baht 8.15% and the Malaysian ringgit 1.03%.
Buy the USD Php!
