The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst. 

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

 

The current political status quo, however, is built around protecting investors—rather than the taxpayers who ultimately pay all the bills—from risk. This method of turning debt into inflation is attractive to governments and their Wall Street enablers because it shifts the burden of runaway spending to ordinary savers and consumers who pay the real price of de facto inflationary default through price inflation, unaffordable homes, stagflation, and falling real wages—Ryan McMaken 

In this issue

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

I. Global Central Banks Predominantly on an Easing Trajectory

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

The decline in June CPI was broad-based and signifies primarily a demand-side factor. And with global central banks on an easing spree, will this and deficit spending anchor the "Marcos-nomics stimulus"?

I. Global Central Banks Predominantly on an Easing Trajectory

Figure 1

Easy money policies have made a dramatic comeback, and charts reveal that global central banks have been reinforcing the market's propensity for leveraged speculative activities.

For the first time since October 2020, the Bank of America (BofA) reports that there were zero rate hikes from central banks last June. (Figure 1, topmost and middle charts)

Ironically, even as inflation has yet to be fully contained or subdued, this aggregate easing trajectory reinforces the path dependency of authorities, primarily in support of the swelling of government control of the economy channeled through the rapid expansion in deficit spending (partly via the war economy), boosting asset prices which serve as collateral, and the backstopping of systemic leveraging (debt expansion).  

In the same vein, the uptrend in US government deficit spending should serve as a template for the world. (Figure 1, lowest image) 

In the Asian region, governments like Thailand (USD 13.5 billion for household debt relief), South Korea (USD 18 billion for Micro Businesses), and Indonesia (USD 28 billion-Free Meal for schools) have been rolling out various forms of politically targeted subsidies in "support of the economy." 

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias 

The Philippine June CPI data illustrates such conditions from the lens of the Philippine political economy. 

Business Times/ Reuters July 5, 2024: PHILIPPINE annual inflation was at 3.7 per cent in June, easing from the previous month on a slower increase in utility costs, the statistics agency said on Friday. The rate, which was below the 3.9 per cent forecast in a Reuters poll, brought the average reading in the six months to June to 3.5 per cent, within the central bank’s 2 to 4 per cent target range. The Philippine central bank said inflation was expected to have settled between the 3.4 to 4.2 per cent range in June. 

This outlook represents an update of our June 10th post, predicting the temporary peak of the recent bounce in inflation.

Firstly, the Bangko Sentral ng Pilipinas (BSP) exercises significant control over the inflation narrative.

Before releasing the Consumer Price Index (CPI) data, the BSP projects a path that serves as the basis for consensus estimates, representing the survey's "normal distribution."

While media outlets focus on the BSP's annual targets when reporting CPI numbers, the public often overlooks the deviation of the consensus median estimate from the actual outcome. It also discounts their flawed predictive track record.

The selective attention from the "pin the tail on the donkey" approach perpetuates "confirmation bias," reinforcing the public's preconceived notion that authorities have complete control over the economy.

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

Next, authorities bask in the glow of reported slowdown in inflation, they quickly claim credit or take a victory lap.

Inquirer.net, July 5, 2024: The lower inflation rate registered in June — at 3.7 percent — is proof that the administration’s economic policies have been effective, House of Representatives Speaker Ferdinand Martin Romualdez said on Friday.

However, few notice that data from the Philippine Statistics Authority (PSA) reveals a different story—this includes officials. 

In fact, it shows that inflation has had an adverse impact on households at the bottom 30%, leading to a widening inequality gap.

Figure 2 

The gap between the national CPI and the CPI of households in the bottom 30% has surged to its highest level since the post-Asian crisis in 2002! (Figure 2, topmost graph) 

While the bottom 30% buys goods at the same prices from the same stores as everyone else, their higher inflation rate highlights the disproportionate loss of purchasing power against goods and services.

The slowdown in the statistical inflation rate has barely alleviated conditions, affecting not only the lowest-income households but also average households, while elites benefit from direct access to the formal banking system and capital markets to safeguard their assets.

Evidence?

Including government external borrowings, FX deposits in Philippine banks have soared to Php 3.324 trillion in May 2024, marking the third-highest level recorded, in tandem with the surging US dollar-Philippine peso pair. (Figure 2, top and middle windows) 

Given the low penetration levels of formal finance and financial literacy, this surge in FX deposits could be interpreted as FX "speculation" by elites and upper echelons of households within the BSP’s jurisdiction. 

Amazing, right?

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

Authorities may view the slowing inflation rate as an accomplishment, but the easing of the CPI is likely to slow further for several politically unpalatable reasons:

Figure 3

One. The PSA's CPI month-on-month rate continues to decline, in contrast to its strengthening which had backed the previous uptrend in the CPI. (Figure 3, upper chart) 

Two. Outside of food CPI, there has been a sustained moderation of the Core (non-food and non-energy inflation) which posted a steady 3.1% in June. Importantly, prices have been falling across the board. Paradoxically, food inflation has been moderating globally. (Figure 3, lower diagram)

Figure 4 

Three. Philippine treasury traders have bet against inflation. T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts. (Figure 4, top and bottom charts)

Four. While the slowing inflation rate has been perennially sold to the public as a supply-side phenomenon, the real story is that this represents a demand-side downturn. 

For instance, in June, we pointed out the surge in consumer credit card and salary loan non-performing loans (NPLs) in Q1 2024. These NPLs have now surfaced to the "core" from the "fringes." 

Businessworld, July 5, 2024: THE BANKING INDUSTRY’S nonperforming loan (NPL) ratio soared to a near two-year high in May, data from the Bangko Sentral ng Pilipinas (BSP) showed. The Philippine banking industry’s gross NPL ratio rose to 3.57% in May from 3.45% in April and 3.46% a year ago. This matched the 3.57% ratio in July 2022. It was also the highest in 23 months or since 3.6% in June 2022.

The BSP data on the banking system’s selected performance indicators confirm our view that the accelerating accounts of consumer borrowings (and businesses) have been used to roll over or refinance existing record debt rather than for consumption.

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. (Prudent Investor, 2024)

Figure 5

Aside from the historic high of held-to-maturity (HTM) assets, rising non-performing loans (NPLs) could exacerbate liquidity tightening in the banking system and exert pressure on banks' accounting profits. (Figure 5, topmost chart)

Loan growth in the banking system has declined in similar fashion to 2018-19, with NPLs on the rise following rate hikes from the increase in the CPI.  (Figure 5, middle and lowest graphs)

Rising NPLs would not only slow loan growth but also negatively impact banks' investment portfolios, increase credit risks, and deteriorate asset quality, ultimately affecting capital conditions. 

While the BSP has employed various regulatory and liquidity measures to disguise the decaying conditions in the banking system, eventually, the chickens come home to roost or these measures will eventually prove ineffective.

Figure 6

Haven’t you noticed? Banks have been increasing their borrowings from the public. While they market these as 'green' or 'sustainable' bonds to piggyback on politically favored themes, they are essentially debt. 

At Php 1.398 trillion, the banking system's outstanding bills and bonds have nearly reached Php 1.44 trillion—levels similar to those seen in 2019 (pre-pandemic). (Figure 6, upper diagram) 

Of course, everyone calls this "sound banking"…until it isn’t. 

The government will release labor data tomorrow, on July 8th. 

Other economic sensitive data, such as external trade and manufacturing, have yet to be released. 

Nonetheless, the S&P Global PMI reported a softening of the manufacturing conditions last June. (bold added) 

The first half of 2024 ended with a further improvement in operating conditions across the Filipino manufacturing sector, as per the latest PMI® data by S&P Global. Output and purchasing activity rose at accelerated rates. However, June marked a notable slowdown in new orders growth. Moreover, manufacturing companies in the Philippines continued to reduce their backlogs, and further trimmed back their staffing levels. Turning to prices, despite a fresh rise in cost burdens, the rate of input price inflation remained weaker than that seen historically. Meanwhile, charges were raised at a softer pace in June. The headline S&P Global Philippines Manufacturing PMI – a composite single-figure indicator of manufacturing performance – fell to a three-month low of 51.3 in June, from 51.9 in May. (S&P Global, July 2024) 

The Philippine PMI seems to have been plagued by a "rounding top." (Figure 6, lower image) 

A slowdown in credit usage by businesses and households will likely exert downward pressure on inflation and GDP.  

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

On the other hand, inflation could find a floor from the ramping up of deficit spending. 

May's expenditure was historic as it almost reached the three-year streak of record-breaking December levels. 

For instance, the Philippine government proposes to import costly fighter jets, which, if pursued, would swell trade deficits and increase the need for external borrowings, potentially further weakening the Philippine peso. Instead of pursuing this path, it might be more effective to focus on resolving territorial disputes via negotiations. 

It's as if these jets would make a significant difference in deterrence and actual combat. 

Figure 7

Nevertheless, helped by May's expenditure-driven budget deficit, May’s public debt soared by 8.9% YoY and 2.2% MoM to a record Php 15.35 trillion in May.

The all-time high in public debt was primarily fueled by a surge in foreign debt (up 8.8% YoY and 4.2% MoM) that spiked its share of the total from 31.4% to 32%. (Figure 7, topmost graph) 

It is no surprise that public debt dynamics are correlated with the USD/Philippine peso exchange rate, as well as with the CPI. (Figure 7, middle image) 

Alongside the transformation of the banking system's business model towards consumer spending, the trickle-down "spending one’s way to prosperity" economic development paradigm focuses on centralizing the economy via the credit-financed record savings-investment gap, channeled through the "twin deficits." This translates to an increasing reliance on foreign savings. 

Subsequently, the deepening reliance on credit increases the incentives for the BSP to ease its monetary policies. 

This also implies that the USDPHP rate is driven nearly entirely by the policy path, as confirmed by data, rather than monetary policy differences between the Fed and BSP. 

With global central banks easing, the BSP can justify its shift to an accommodative stance. 

And as noted earlier, the BSP easing and increased public spending in support of GDP growth could signify the "Marcos-nomics stimulus." 

In light of this, the Philippines would most likely join the ranks of its neighbors in throwing down the gauntlet of stimulus. 

It wasn't until a single 100-basis-point rate cut that the CPI began to rise, accelerate, and sow the seeds of the present 9-year CPI trend. (Figure 7, lowest chart) 

Are we witnessing a repetition of the inflation cycle? 

___

References 

Ryan McMaken, Three Lies They’re Telling You about the Debt Ceiling May 23, 2023, Mises.org 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

S&P Global, Production growth sustained, although underlying demand trends soften S&P Global Philippines Manufacturing PMI July 01, 2024 PMI.SPGLOBAL.com

 

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

 

Keynesianism is the destruction of the middle class. By printing money and bloating deficits and spending, the size of government in the economy rises faster than the private and productive sectors. The size of the government increases during recessions by increasing expenditure to combat them, and it also increases during economic downturns by hiking taxes and creating inflation, which is a hidden tax—Daniel Lacalle 

In this issue

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting in August? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?  

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position? 

IV. Public Spending Surges to Fourth-Highest Level on Record in May! 

V. Will the Government Introduce a Fiscal Stimulus Package Soon? 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

VIII. Five-Month Debt Servicing Costs Hits Record High! 

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation 

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks 

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

With the BSP priming the public for a policy easing this August, and May public spending reaching a non-December all-time high, could this signify the implementation of a 'Marcosnomics' signature stimulus?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting August?

Businessworld, June 28,2024: THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates steady for a sixth straight meeting on Thursday but signaled that a rate cut at its next meeting in August is “somewhat more likely than before,” with up to 50 basis points (bps) in easing likely this year…Mr. Remolona said he expects inflation to further ease in the second semester with the implementation of lower tariffs on rice. 

If an increase in rice tariffs will lower the CPI, why would this require the BSP to cut rates?

Policy rates represent a tool for managing aggregate demand, largely ignoring the impact on balance sheets.

By signaling a cut, is the BSP admitting to a worsening slowdown in demand?

Don’t you see the contradiction? Why would the BSP use a demand management policy to address a supply-side concern? 

For the avoidance of doubt, the results of the BSP’s latest consumer survey corroborate their implicit worries (bold added): The consumer sentiment in the Philippines was more pessimistic for Q2 2024 as the overall confidence index (CI) became more negative at -20.5 percent from -10.9 percent in Q1 2024. The decline in the index is reflective of the increase in the percentage of pessimists, which outweighed the increase in the percentage of optimists. The weaker confidence among consumers was mainly due to their concerns over the: (a) faster increase in the prices of goods and higher household expenses, (b) lower income, (c) fewer available jobs, and (d) the effectiveness of government policies and programs on inflation management, traffic and public transportation, provision of financial assistance, and labor and employment.  For the next quarter (Q3 2024), the CI turned negative at -0.4 percent from 2.7 percent in Q1 2024. However, the consumer sentiment for the next 12 months (May 2024-April 2025) remained optimistic as the CI was little changed at 13.5 percent from 13.4 percent in Q1 2024. (BSP, June 2024) 

So, could this be the genuine reason for the entrenchment of the BSP’s 'dovish' stance? 

It does not stop there. 

It’s not just consumers; businesses have also shared this dour sentiment for 2024. 

This is according to another BSP survey. (bold mine): The business sentiment in the Philippines turned less upbeat in Q2 2024 as the overall confidence index (CI) declined to 32.1 percent from 33.1 percent in Q1 2024. This is reflective of the combined decrease in the percentage of optimists and the increase in the percentage of pessimists. The Q2 2024 business confidence turned less buoyant due mainly to the firms’ concerns over: (a) softer demand for goods and services such as personal care, health and other consumer products, construction supplies, city hotels and restaurants, and manpower services, (b) ongoing international conflicts that may push oil prices higher, (c) slowdown in business activity due to El Niño-induced extreme weather conditions, and (d) persistent inflationary pressures that may weigh down consumer spending. For Q3 2024, the country’s business confidence weakened as the overall CI also fell to 43.7 percent from 48.1 percent in the Q1 2024 survey result. For the next 12 months, business outlook was similarly less upbeat as the overall CI decreased to 56.5 percent from 60.8 percent in the Q1 2024 survey result (BSP, June 2024) 

Even before this survey, has the BSP been aware that the revenue growth of listed retail chains had been struggling for some time? 

Besides, why did the BSP not address the escalating tensions between the Philippine government and China over the disputed South China Sea claims? 

An outbreak of violence in the region would not only disrupt global supply chains but also raise the specter of a wider conflict—a "casus belli"—that could have severe socioeconomic and financial consequences for the Philippines. 

Does this represent another case of an analytical "blackout?" 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?

On the other hand, how would interest rate cuts boost demand, incomes and jobs if household and business balance sheets are already heavily leveraged?

Figure 1

Has the BSP not learned from the Bank of Japan's experience with negative nominal interest rates, where instead of stoking inflation, it exacerbated the curtailment of demand that led to its "lost decades?" (Figure 1, topmost graph)

Further, would the BSP's rate cuts not only magnify economic imbalances and stoke inflationary pressures but also widen inequality between those with access to formal credit and those reliant on shadow banking, such as small and medium enterprises (SMEs)?

Moreover, has the BSP also expressed concerns over the deteriorating conditions in the banking system, where higher interest rates have led to the erosion of accounting profits, potentially worsening financial liquidity conditions and exposing the solvency issues of bank borrowers and the industry? (Figure 1, middle and lower windows)

Will the BSP’s rate cuts not amplify the balance sheet imbalances?

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position?

Along with the above, as previously noted, May's CPI could represent an interim peak. We arrived at this conclusion based on several factors:

Figure 2

1. Slowing month-over-month momentum in the CPI

2. A bullish flattening of the Philippine treasury yield curve, which narrowed further in June (Figure 2, topmost graph)

3. Instead of boosting demand, the elevated leverage in household balance sheets—as revealed by record consumer spending—has fueled an increase in consumer non-performing loans (NPL)

4. Deteriorating job market conditions

5. The recent bounce in imports may be driven by substitution effects due to production slack

6. The rising US dollar-Philippine peso exchange rate, which not only contributes to higher import and financing costs but also puts pressure on local industries to generate more foreign exchange revenues to fill the widening trade gap. (Prudent Investor, June 2024)

The BSP has published its projected CPI for June (3.4%-4.2%)—which seems tilted lower than May (3.7%-4.5%). The next step will be for the consensus "to pin the tail on the donkey" by selecting numbers within the BSP’s range.

If the CPI slows, would it validate our view that the economy has been slowing faster than expected? And would this justify the BSP’s proposed easing this August?

IV. Public Spending Surges to Fourth-Highest Level on Record in May!

We also noted peculiar signs of restraint in government spending in the first four months of 2024.

However, this trend may have reversed in May, as the enlarged deficit emanated from outsized government spending!

Inquirer.net, June 28, 2024: The government reverted to a fiscal deficit in May, after posting a P42.7-billion surplus in April, amid higher public spending fueled by accelerating inflation and a high-interest environment…Government spending in May amounted to P557 billion, accelerating by 22.24 percent mainly driven by allotments to government agencies’ projects and budgetary support to local government units and state-run corporations. For the first five months, disbursement reached P2.3 trillion, up by 17.65 percent…For this year, the government has set a budget deficit ceiling of P1.48 trillion, or equivalent to 5.6 percent of gross domestic product (GDP). It also aims to reduce the deficit-to-GDP ratio to 3.7 percent by 2028.

May's government spending represented the fourth largest on record, according to data from the Bureau of Treasury! (Figure 2, middle chart)

Ironically, this May spending surge was in line with the biggest spending streams that occurred in December over the last three years—when the government typically used the final month to meet or exceed (political) expenditure targets. Yet, it is not even the end of the second semester. (Figure 2, lowest image)

Or, public spending in May was the highest on record (excluding the December expenditures)!

Has the government's frontloading of expenditures last May broken the seasonal December spending cycle? 

That’s right.  The surge in May’s deficit spending may set the template for the coming months through the year-end—we can only expect December spending to surge even more (or hit a fresh milestone)! 

Because of the revenue or collection slowdown, the spending ballooned the fiscal deficit way above 2023’s level. 

V. Will the Government Introduce a Fiscal Stimulus Package Soon?

Figure 3

Remember that government revenues are dependent on economic, financial, and administrative performance, while spending is programmed as part of the Congress—approved budget. 

For instance, not only does public spending play a crucial role in shaping economic imbalances that can lead to inflation, but inflation also has a material influence on revenue collection. Revenues depend on the declared transacted price levels.  That is to say, a slowdown in private GDP growth would materially widen the fiscal deficit. (Figure 3, top and middle visuals) 

The government has already proposed a 10% increase in the 2025 budget to Php 6.35 trillion. 

A surge in public spending increases a segment of the private sector’s revenues from Public-Private Partnerships (PPP) and other direct and indirect linkages via the political bureaucracy—which will be used for "consumption." 

Therefore, as we observed in our early June post, 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend?  (Prudent Investor, May 2024) 

Are authorities expecting an economic downturn? Are they preparing the public for the launch of a grand stimulus through measures via easing rates, liquidity injections, and deficit spending? 

As we concluded from the same note last May, 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels. 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

The increase in the fiscal budget gap for May translates to an impending reversal in the four-month deceleration of public debt issuance. (Figure 3, lowest chart) 

Intriguingly, some quarters have praised this deceleration without fully comprehending the policy "path dependency" of the authorities. 

Subsequent to the April announcement of a Php 2.57 trillion target for 2024, which represents an 8.9% increase from last year's Php 2.07 trillion, the government has already declared that it proposes to raise Php 600 billion in Q3, following the projected Php 585 billion increase in Q2.

As of May, the Bureau of the Treasury (BoTr) has raised Php 1.038 trillion, which amounts to 40% of the projected Php 2.57 trillion financing.

The increase in the May’s fiscal budget gap translates to a coming reversal in the four-month deceleration in public debt issuance.  Intriguingly, some quarters have exalted this deceleration with hardly a comprehension of the policy path dependency of authorities. 

And subsequent to the April announcement of a Php 2.57 trillion target in 2024 or an 8.9% increase from last year’s Php 2.07 trillion, the government has already declared that it proposed to raise Php 630 billion in Q3 following the projected Php 585 billion domestic borrowings in Q2. 

Through May, the BoTr has raised Php 1.038 trillion or 40% of the projected Php 2.57 trillion financing. 

This path dependency on deficit spending would entail increases in systemic leveraging. 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

How is the government deploying our anticipated 'stimulus'?

Figure 4

We anticipated a reversal from the recent slack in LGU allocations, primarily due to the upcoming 2025 Senate and local elections.

The 'proxy war' between the US-NATO alliance and the Russia-China-BRICs alliance is playing out in the domestic political sphere through an intensifying contest between the incumbent and former administrations, where LGUs will play a pivotal role in determining the winners.

The pro-China former President and his two children plan to run for Senate in 2025 against the pro-US incumbent.

Facilitated by the BSP's easing and the banking system's liquidity infusions, the incumbent administration is expected to disproportionately increase budgets for select and favored LGUs that will promote their domestic and geopolitical agendas.

Although LGU allocations increased by 8.54% in May, the 5-month growth surged by 10.6%, reaching a nominal spending of Php 420.3 billion, the second-highest on record. (Figure 4, upper graph)

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! (Figure 4, lower image)

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus."

VIII. Five-Month Debt Servicing Costs Hits Record High!

But there is more.

Figure 5

Notably, interest payments skyrocketed by 47.8% in May alone! (Figure 5, topmost graph)

Over the 5-month period, interest payments soared by 40% to a record high of Php 321.6 billion. As it is, the pie of interest payments rose to 14.24%—its highest level since 2009!

Consequently, 5-month debt servicing (including interest and amortization) surged by 48.5% to an unprecedented Php 1.217 trillion, accounting for 91.78% of the full-year debt servicing in 2023! (Figure 5, middle and lowest windows)

Specifically, amortizations are just 8.22% below the 2023 levels, while interest payments remain 48.8% short of last year’s level.

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation

Adding these together, the BSP’s incentive to ease or cut rates is largely political in nature.

Primarily, it aims to lower financing costs to support the administration’s pre-election geopolitical and GDP "stimulus," while mitigating the rising costs of public debt servicing. 

Additionally, it seeks to alleviate liquidity and solvency challenges affecting the banking industry and its clients. 

The banking system operates similarly to a cartel under the BSP's oversight.

Figure 6 

Faced with stepped-up deficit spending, the BSP could likely bankroll this by increasing its direct liquidity operations (net claims on the central government—NCoCG); a strategy previously employed in 2020. (Figure 6, topmost chart) 

In coordination with the BSP, banks are also expected to increase financing of public debt through purchases of government debt (NCoCG). (Figure 6, middle graph) 

The acceleration of the banking system’s historic NCoCG has mirrored the surge in the record-high in public debt. May’s data will be reported by BuTr in the first week of July.

Figure 7

Let's not forget that banks have also been significant borrowers of local savings to bridge gaps from deposit shortfalls, hidden non-performing loans (NPLs), substantial mark-to-market losses, and record Held-to-Maturity (HTM) assets reflected on their balance sheets.

The banking system's bonds and bills payable have been approaching the Q4 2019 zenith. (Figure 7, topmost image)

Essentially, the banking system is in tight competition with the government and non-financials for access to the public's savings. 

Not only does this put a floor on rates, but it also provides an incentive for the BSP to expand liquidity operations to keep the system afloat. Yet, this entrenches inflation, the interconnectedness of leverage, and the potential transmission of risks.

As such, while we expect the rebound in the CPI to have likely climaxed in May—largely due to growing slack in the private sector—a burst of deficit spending should put a floor under it. 

Along with this, the specter of stagflation rises.

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks

It is no coincidence that the rise in the USD to Philippine peso exchange rate has closely correlated with public spending.

Put differently, monetary inflation in support of the “trickle-down” policies that lead to the “twin deficits” emasculates the purchasing power of the peso against the USD and gold. 

So there you have it.  The BSP’s ‘dovish’ stance is largely in consonance with the acceleration of the national government’s intensifying deficit spending. 

While intended as a GDP “stimulus,” these measures also serve other underlying political agendas—facilitating access to cheaper domestic savings for pre-election financing, geopolitical activities, other domestic political objectives, and cushioning banks from worsening balance sheet challenges. 

As the above shows, the Philippine government and the establishment have been so hooked on stimulus in the hope that it will deliver some form of utopia. 

Yet, the more the interventions, the deeper the imbalances, the greater the probability of risks. 

___

References: 

Daniel Lacalle, The U.S. fiscal nightmare. Yellen cannot expect a strong economy with higher spending and taxes, dlacalle.com May 26, 2024 

Bangko Sentral ng Pilipinas, Consumers are Pessimistic in Q2 and Q3 2024, But Optimistic for the Next 12 Months*, June 28, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, Businesses are Less Optimistic in Q2 2024, Q3 2024, and the Next 12 Months*, June 28, 2024, bsp.gov.ph  

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

Prudent Investor, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024

 

PSEi 30 Posted its Largest Weekly Plunge of 3.53% in 2024: Why the Incredible Silence on the Influence of the June 17th Ayungin Shoal Incident?

Journalists cannot serve two masters. To the extent that they take on the task of suppressing information or biting their tongue for the sake of some political agenda, they are betraying the trust of the public and corrupting their own profession—Thomas Sowell

PSEi 30 Posted its Largest Weekly Plunge of 3.53% in 2024: Why the Incredible Silence on the Influence of the June 17th Ayungin Shoal Incident?

Why has the June 17th Ayungin Shoal Incident been absent from all media narratives on the stock market? Is censorship making a comeback?

Here is a list of news articles carrying Friday’s selloff at the Philippine Stock Exchange:

Inquirer.net, June 22, 2024: A weaker peso and strong foreign selling pushed the local bourse over its steepest drop of the year so far on Friday, with the benchmark index touching the 6,100 level for the first time in seven months. The Philippine Stock Exchange Index (PSEi) entered an eight-session losing streak on the last trading day of the week, falling by 2.93 percent, or 186.08 points, to close at 6,158.48…Philstocks Financial Inc. research analyst Claire Alviar noted that the market’s negative performance was due to strong net foreign selling, recording a net outflow of P1.34 billion…The local bourse has been falling in recent weeks, mostly due to the Bangko Sentral ng Pilipinas hinting at fewer interest rate cuts this year, which would mirror the move of the US Federal Reserve.

Philstar.net, June 22, 204: The stock market plunged to its lowest level this year as the peso fell to nearly 20-month low against the dollar. The benchmark Philippine Stock Exchange index (PSEi) lost for the eighth consecutive session, plummeting by 2.93 percent or 186.08 points to end at 6,158.48. This was the PSEi’s lowest level in over seven months or since hitting 6,110.88 in Nov. 15, 2023.

Manila Times, June 22, 2024: THE peso and the stock market ended the week on a sour note with both hitting multi-month lows amid a continued lack of positive catalysts. Analysts said that both the currency and financial markets had taken their cues from each other and that sentiment also remained negative amid continued dollar strength and a tech sell-off on Wall Street.

PNA, June 21, 2024: The local stock market ended the last trading day of the week in the negative territory due to net foreign selling, while the peso closed almost flat. The Philippine Stock Exchange index (PSEi) dropped 186.08 points to 6,158.48, while the broader All Shares also fell 65.11 points to 3,375.20. "The local bourse dropped by 186.08 points (2.93%) to 6,158.48 due to strong net foreign selling, recording a net outflow of P1.34 billion. The market’s new level is its lowest this year and marks its 8th straight day of decline. Additionally, the weakness of the peso against the US dollar continued to weigh on sentiment," Philstock Financials, Inc. research associate Claire Alviar said.

The three wise monkeys: "see no evil, hear no evil, speak no evil"

Isn’t it surprising that there’s NO mention of the escalating West Philippine Sea conflict in media coverage of stocks and the peso? 

Does the rising risk of a full-blown conflict hold any implications for the local financial markets?

Could the chaos — including the death, injury, disability, and destruction of private and public property — even lead to a stock market rally?

It’s incredible to observe that after the media passionately highlighted the knife-toting, boat-ramming, and boat-boarding incident by the Chinese Coast Guard at Ayungin Shoal on June 17, Philippine authorities backpedaled from calling it an "armed attack" that could have triggered the Mutual Defense Treaty (MDT) with the US government, potentially escalating into World War 3.

And yet, the astonishing code of silence by the establishment on its economic and financial impact!

However, foreign investors seem to have taken a different page from local media.

Down by 3.53%, the PSEi 30 suffered its largest weekly decline in 2024, with 83% of this week's deficit attributed to Friday's 2.93% plunge.

Figure 1

This selloff was aggravated by a substantial 1.26% pre-closing dump. (figure 1, topmost pane) 

Friday's meltdown saw a significant outflow of foreign funds, with net selling reaching Php 1.34 billion that represented 48.83% of the week's total outflows. (Figure 1, middle graph)

Foreign money has been selling the PSE in the last 12 of the 13 weeks.

Figure 2

Yet this week's selloff affected most of the 10 largest heavyweights, with the top 5 market caps continuing to decline. (Figure 1, lowest graph) (Figure 2, upper window) 

Could this be the law of mean reversion in motion?

The selloff can hardly be attributed to global developments, as the PSEi 30 suffered the largest weekly deficit among Asian-Pacific stocks. (Figure 2, lower diagram)

Could the weak peso be the culprit?

As earlier noted, the peso's frailty is a long-term trend. Why should concerns over a USDPHP breakout suddenly become an immediate threat to foreign investors?

Moreover, why would foreign funds rush for the exit when the region was experiencing a "fear of missing out" (FOMO) mood?   Eleven of the 19 national indices closed higher, with an average return of 0.44%, while four national benchmarks hit fresh record highs.

In addition to imbalances from market concentration plaguing the PSEi 30, sluggish local volume exacerbated its downside volatility due to panic selling.

Figure 3

Despite a significant boost from cross trades by institutional brokers, the five-month trading volume hit a four-year low, further reinforcing its long-term downtrend. (Figure 3, upper graph)

Once again, dwindling trading volumes increase the risk of a market crash.

Though oversold from Friday’s plunge, which could see a bounce this week, the latest breakdown of the PSEi 30 makes it vulnerable to testing recent lows (5,960 October 27, 2023 and 5,740 September 30, 2022). (Figure 3, lowest chart)

Lastly, media narratives typically focus on either post hoc or availability bias when attributing recently concluded events, but why the blackout on the June 17th Ayungin Shoal incident?

Bottom line: Are authorities assuming that shielding the public from the escalating risk of war will somehow keep the economy and financial markets afloat?

Is censorship making a comeback?