Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing

 

The global government finance Bubble dwarfs all previous Bubbles. Insatiable demand for perceived safe government debt and central bank Credit has allowed this Bubble to inflate for more than 15 years. Years of massive deficit spending ensure deeply systemic economic maladjustment. Endemic deficit spending has inflated incomes and corporate profits, in the process working to inflate historic securities, housing and other asset market Bubbles—Doug Noland

In this issue:

Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

VI. Debunking The Overton Window’s "Supply Side" Inflation

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing 

The changes in VAT reporting resulted in the narrowing of the Philippine government's budget deficit in July. "Marcos-nomics" remains in action as the government's spending binge persists. Authorities raised USD 2.5 billion—what are the possible implications? 

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly 

The establishment media, which self-righteously pontificate on the war against disinformation and misinformation, tell us that July's "narrowed" deficit was implicitly a function of either a vigorous economy, "sound" management policies of the government, or even both. 

Although some reports mention the rescheduling of VAT payments from monthly to quarterly as a factor that caused the ballooning revenues leading to such distortions, this aspect remains mostly untouched. 

Here’s the Bureau of Treasury: The YoY growth was due to higher collections of Value Added Tax (VAT), income taxes, other domestic taxes, and percentage taxes. The growth in VAT collection was partly attributed to base effects as collections last year were lower by around two months' worth of VAT collection with the shift from monthly to quarterly filing of VAT payments as mandated by the Tax Reform for Acceleration and Inclusion (TRAIN) Law. (bold added) 

A top accounting firm explained (bold italics original, bold mine): 

One of the notable changes that will be implemented this year is the removal of the monthly filing of Value-Added Tax (VAT) returns. Section 37 of the TRAIN Law, amending provisions of Section 114(A) of the Tax Code of 1997, as amended, and as implemented under Section 4-114-1(A) of Revenue Regulations (RR) No. 13-2018, states that “beginning January 1, 2023, the filing and payment required under this subsection shall be done within twenty-five (25) days following the close of each taxable quarter”. Thus, VAT-registered taxpayers are no longer required to file the Monthly VAT Declaration (BIR Form No. 2550M) for transactions starting January 1, 2023. Instead, they will file the corresponding Quarterly VAT Return (BIR Form No. 2550Q) within twenty-five (25) days following the close of each taxable quarter. (Grant Thornton, 2023)

Figure 1

So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter. 

Since 2023, revenue spikes have led to budget surpluses in four of the seven—close of the taxable quarters of January, April, July, and October—while the remaining three quarters reported deficits of less than Php 50 billion. (Figure 1, topmost window) 

Therefore, it is reasonable to predict that deficits will swell in August and September, while easing again in October 2024. 

Additionally, because of the distortions from quarterly reporting, revenue statistics should be viewed and interpreted on an end-of-quarter basis. 

Nonetheless, irrespective of how the media depicts and interprets it, July’s public expenditures represent the sixth highest non-seasonal (ex-December) spending and the eleventh highest including the seasonal spikes of December. (Figure 1, middle image) 

Public spending over the seven-month period surged by 13.2% to a record Php 3.3 trillion, even as revenues spiked by 28% to an all-time high of Php 2.61 trillion. This resulted in a Php 642.8 billion deficit, which is 7.2% higher than in 2023.

The surge in July spending signifies a validation of our prognosis regarding the unannounced "Marcos-nomics stimulus," which has been further confirmed by the August BSP rate cut. (Prudent Investor, 2024)

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

Although authorities reported a (-6.34% YoY) slowing of July financing while its cash reserves (-21.54% YoY) fell further, the explosion of Marcos-nomics stimulus spending is bound to reverse this. (Figure 1, lowest graph)

Mainstream experts, who focus on a single statistic while ignoring the bigger picture and (political) path dependency, are likely to misread, misinterpret, and draw brazenly erroneous conclusions.

For instance, the DOF chief tells us that "the country's rising debt is not a cause for worry."

Figure 2

But the thing is, July's interest payments alone hit an all-time high as public debt reached a record Php 15.5 trillion last June.  The 7-month share of interest payment-to-total expenditures has risen to its highest level since 2009! (Figure 2, top and middle charts)  

Authorities will publish July's debt standing next week.

And it doesn’t stop there.

For the first seven months of 2024, the aggregate debt servicing reached a milestone high in peso levels with a 40.6% YoY growth spike. This increase was driven by 44.9% and 32% growth spikes in amortization and interest payments, respectively. (Figure 2, lowest diagram) 

Figure 3

As a consequence, because July's amortization and interest payments were 7% and 27% below their comparative levels last year, this year's total debt servicing accounted for 15% below last year—with 5 months to go! (Figure 3, topmost image) 

It is no coincidence that the government raised USD 2.5 billion last week, on top of the USD 2 billion last May, which authorities partially used to prop up its Gross International Reserves (GIR).

Bloomberg/Yahoo Finance, August 29, 2024: The Philippines priced $2.5 billion of dollar bonds, its second such offering this year and the largest of a flurry of deals Wednesday in Asia before a likely Federal Reserve interest rate cut…The Philippines raised $2 billion in a May dollar bond deal that Finance Secretary Ralph Recto said at the time was part of its plan to generate about $5 billion in funding from overseas markets this year. The new offering was the largest of five note sales in the US currency on Wednesday, the most Asian issuers in six weeks, according to data compiled by Bloomberg based on deals with a minimum size of $100 million

The Philippine government also secured a $500-million climate financing support from the Asian Development Bank (ADB) under its Climate Change Action Program Subprogram 2—a climate change policy-based loan. 

Regardless of whether debt is politically labeled as green (climate or sustainable) or not, it is still debt that must be repaid. Political colors don’t change the functionality of credit. 

The recent spate of external borrowings is likely to push total external debt—which was already at a historic level in Q1 2024—to even greater heights! (Figure 3, middle pane) 

Given these factors, why would the government continue raising external (and local) debt if deficit spending were under control? 

And how would such political path dependency assure us that the relentless rise in public debt (as part of systemic leverage) is 'not a cause for worry'? 

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State 

So, what did the government spend on last July? 

Except for net lending and subsidies, government expenditures grew for Local Government Unit (LGU) allocations (12.2% YoY), interest payments (25%), equity (608%), and national government disbursements (9.44%).

Net lending represents the net advances by the National Government for the servicing of government-guaranteed corporate debt.

Meanwhile, equity refers to the National Government’s investments in the authorized stock of Government-Owned and Controlled Corporations (GOCC).

The three largest segments of public spending in terms of distribution were interest payments (16.3%), LGU allocations (17.7%), and National Government disbursements (63.1%).

While NG disbursement was lower in peso terms, as we have been pointing out, LGU spending—which likely represents funding for the forthcoming 2025 national elections—has been picking up steam.

 Figure 4 

From a seven-month perspective, NG disbursements in pesos reached an all-time high, as the growth rate nearly doubled from 6.4% in 2023 to 12.9% in 2024. (Figure 4, middle graph) 

Meanwhile, LGU outlays have played catch-up, with a growth spike from 2.7% in 2023 to 13.2% in 2024, reaching the second-highest level. (Figure 4, topmost chart) 

Aside from other programs, the authorities plan to acquire 40 multi-role fighters to supposedly boost the nation’s defense.

According to Interakyson/Reuters: "President Ferdinand Marcos Jr has approved “Re-Horizon 3”, an acquisition plan for new military weaponry and equipment worth 1.89 trillion pesos ($33.64 billion) to boost defenses."

The Marcos-nomics stimulus has been directed at pre-elections, the transition to a war economy and infrastructure, as well as the administrative/bureaucratic state. For example, there are over 200,000 vacancies in government jobs.

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

On the other hand, the boost in LGU allotments has also manifested through a three-month growth surge in cash in circulation, which increased from 6.1% in May to 6.9% in June and 8.1% in July. (Figure 4, lowest visual)

The peso level of cash in circulation reached its fourth-highest level last July (including the seasonal peak in December).

The upside bump in liquidity translates to a relative increase in demand—where LGUs spend—and percolates into the national level.

The spillover effect of the stimulus is further amplified by the spending boost from the National Government.

Such expenditures, once again, benefit the recipients of credit-financed public spending first, creating ripples across the political economy through various stages, primarily affecting entities connected with the government before reaching the general economy.

This swelling of government expenditures via resource consumption crowds out or limits its availability to the private sector—a phenomenon known as the "crowding out effect."

Figure 5

As a result, the surge in public revenues reflects the initial reactions to the intensified public expenditures. Bank lending and inflation also help support public revenues.  (Figure 5, top and middle windows)

The distortive effects—boosting aggregate demand without a proportional increase in production—exert pressure on the overall price level.

The intensifying mismatch between demand and supply (limited by the crowding-out syndrome) likewise translates to increased pressure for higher imports, magnifying the "twin deficits," which explains part of the USD 5 billion overseas issuance. (Figure 5, lowest chart)

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

Furthermore, as the biggest borrowers, the government will increasingly draw from the public’s dwindling savings, competing with the massive credit requirements of San Miguel, the PSE’s non-financials, unlisted non-financials, banks, the financial industry, and households.

The crowding out effect, also evidenced by the record widening of the saving-investment gap, further explains the acceleration in external borrowings.

Of course, due to decaying productivity and the deepening drawdown in savings, households have intensified their reliance on credit to sustain their lifestyles. This dynamic is demonstrated by the structural shift in Philippine bank lending toward consumer loans, coming at the expense of producers.

Figure 6 

Part of this drawdown in savings is exhibited by slowing deposit growth. (Figure 6, topmost graph) 

Last July, universal-commercial bank supply-side loans increased by 8.8%, while consumer loans grew at a slower rate of 24.3%. (Figure 6, middle image) 

However, the gap between the share of consumer loans and production loans reached an all-time high. (Figure 6, lowest chart) 

Yet, the supply-side loan growth was primarily driven by a 438% spike in borrowing by the professional, scientific, and technical sector—a majority of which is constituted by activities of head offices. Bank lending would have been stifled were it not for this development.

Figure 7

Such are the reasons behind the intertwined trajectories of public expenditures and the Consumer Price Index (CPI). The causal relationship is reflected by the accelerating trend of public spending fueling the nation's inflation cycle. (Figure 7, topmost image)

VI. Debunking The Overton Window’s "Supply Side" Inflation

Have you ever heard the media and their favorite establishment experts talk about how demand, driven by government policies, is the primary source of inflation? 

Of course, not.

Like the nasty and deleterious side-effects of the pandemic lockdown and the COVID vaccines as well as the NATO’s proxy war playing out in Ukraine (where establishment media unilaterally demonizes Russia), the BSP-government driven inflation represents a taboo.

There is hardly any balance in mainstream’s reporting or analysis. The government determines the Overton Window—alternative opinions are either censored or suffer from the cancel culture.

Ironically, that inflation is caused by the government is apparent on their reports.

For instance, in the BSP’s July 2024 report on domestic liquidity, "Net claims on the central government expanded by 14.0 percent, up from 12.1 percent partly due to sustained borrowings by the National Government."

Sustained borrowings by the National Government from the banking system. 

But what are net claims on the central government (NCoCG)? 

Again, from the BSP, "Net Claims on CG include domestic securities issued by and loans and advances extended to the CG, net of liabilities to the CG such as deposits" (BSP, 2024)

In essence, banks and financial institutions fund the government’s boondoggles through credit expansion (printing money).

Unfortunately, hardly anyone bothers to explain this phenomenon to the public: except for one instance, the pandemic.

To highlight its rescue efforts, the BSP discussed its historic PHP 2.3 trillion liquidity injections from 2020 to 2022, but a code of silence has surrounded this topic prior to and after.

In contrast, the public has been bombarded or hardwired with the brazen tomfoolery of the "supply side" aspect of inflation. 

This narrative effectively absolves the government of accountability and attributes inflation to "greedflation" or "greedy" entrepreneurs or "market failure."

Yet the fundamental law of economics (demand and supply)—where prices basically coordinate the balance of demand and supply—debunks this popularly held belief.

Aside from the balancing role of prices, supply side disruptions cause RELATIVE inflation on prices and services (directly and indirectly affected). To wit, price increases in several areas will result in DECREASES in others—given the scarcity of the (supply) of the medium of the exchange (Philippine peso).

Or, supply disruptions do not cause a generalized and prolonged loss of purchasing power.

But little of this economic truth seems to matter.

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

This brings us to "Marcos-nomics Stimulus." Because of the Overton Window, the public has limited understanding of public financing, which they believe is an exclusive domain of direct taxation and government borrowing.

Still, neither have authorities told the public that the BSP has yet to scale down its massive holdings of Philippine treasuries (NCoCG) nor the back-to-back All-time highs in the banking system’s NCoCG. (Figure 7, middle and lower charts)

Figure 8

Furthermore, following the PHP 3 trillion spike in 2020-2021 (not PHP 2.3 trillion as declared), the BSP’s asset base of PHP 7.51 trillion (as of February 2024) remains only 6.3% lower than its historic high of PHP 8.013 trillion in October 2021. (Figure 8, topmost chart)

Briefly, the BSP has hardly wound down on its QE as reflected by its near-record share of holdings of domestic treasuries, even as the BSP has replaced some of this with a buildup in FX borrowings. (Figure 8, middle graph) 

Again, this represents another reason for the government’s recent external borrowing.

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. (Figure 8, lowest window) 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble.

____

References

 

Doug Noland, Weekly Commentary: Money Machines, August 31, 2024, CreditBubbleBulletin.blogspot.com

 

P&A Grant Thornton, A closer look at quarterly VAT filing, February 7, 2023, grantthornton.com.ph

 

Prudent Investor, Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness, August 18, 2024

 

Bloomberg, Yahoo Finance, Philippines Sells $2.5 Billion of Dollar Bonds in Asia Deal Rush, August 29, 2024

 

Bangko Sentral ng Pilipinas, Central Bank Survey and Depository Corporations Survey July 2024, bsp.gov.ph

 

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

 

True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression—Ludwig von Mises

In this issue: 

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example 

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications 

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

IX. PSEi 30 1H Analysis: A Concise Industry Overview

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

In a detailed analysis, we highlight the growing disconnect between PSEi 30 fundamentals (for Q2 and 1H 2024), PSEi 30 prices, and GDP.

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP 

The PSEi 30 soared by 7.03% in Q1 2024, plummeted 7.12% in Q2, or was almost flat with a slight decrease of 0.6% in the first half of the year. 

However, two months into Q3, the PSEi 30 has fully recovered its Q2 losses and was up 7.94% YTD as of August 22nd.

Despite the fragile consumer conditions, owing to the "Marcos-nomics stimulus" channeled via record deficit spending, Q2 GDP rose to 6.3%.

Nevertheless, the dynamics in motion in Q1 extended through Q2 2024 and in the first half of the year.

In our conclusion last May, 

In the end, the loosening of financial conditions has led to an increasing divergence between corporate share prices and fundamentals. 

Furthermore, the PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a private sector slowdown, which has even affected the elites, translating to further hardship for the middle and lower classes, and a booming government. (Prudent Investor, May 2024) 

Let's compare the debt conditions of the non-financial members of the PSEi 30 with its entire constituents. 

However, there are some caveats regarding the presented statistics. 

Nota bene:  

-Older data, representing PSEi members of the specified Q2 end-of-period, presents an apples-to-oranges scenario. The PSEi periodically updates its constituents, which we labeled as 1A data. 

-The older data also excludes data revisions. 

-Current or 2023-2024 Q2 data provides a more accurate comparison as it reflects present members, labeled here as 1B data. 

-The aggregates are overstated due to holding companies incorporating subsidiaries. 

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

Figure 1

The table presented is an example of 1B data. It compares the recently published first half (1H) of 2024 numbers with the first half of 2023 figures of PSEi firms. (Figure 1, top table) 

The 2023 headlines and the rest of the historical data are referred to as 1A. 

Despite coming from a high base, the debt of non-bank PSEi 30 members increased by 5.9% or Php 308.5 billion to Php 5.535 trillion, which is the second highest on record, following last year's Php 5.6 trillion (1A). (Figure 1, middle graph)

The net debt increase of Php 308.5 billion was the fourth highest, after 2022, 2020, and 2023 (1A).

While fifteen of the 27 non-bank PSEi 30 firms posted increases in debt (1B), San Miguel’s eye-popping PHP 147 trillion accounted for 53% of the total. 

The other top borrowers were Ayala Corp (Php 46.3 billion), Ayala Energy subsidiary ACEN Corporation (Php 34.5 billion), and Aboitiz Equity (Php 26.85 billion). 

It's important to note that this discussion does not include the borrowings of PSEi 30 banks. 

The good news is that despite the massive debt increase, soaring bank assets have led to a reduced PSEi 30 Debt-to-Total Financial Resources ratio, which has dropped below 2019 levels. (Figure 1, lowest image) 

But here's the caveat: while bank assets outgrew the PSEi 30’s non-bank debt—partly due to the non-inclusion of bank debt data—banks still represent a substantial source of lending to PSEi firms.

Furthermore, the outperformance of bank assets has been driven by the steep growth in consumer credit exposure and holdings in Philippine government debt. 

Additionally, some companies may have tucked away debt through other classifications (e.g., lease liabilities) or via off-balance sheet arrangements, which may result in an understated actual debt position. 

Figure 2

For instance, while Wilcon Depot has no published debt, interest expenses (from lease liabilities) have been on an uptrend. (Figure 2, topmost chart)

In this way, understanding the mechanics behind the statistics can help strip away the façade of good news based on headline metrics.

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt 

Second, media headlines captivate their audiences by focusing on the percentage gains in revenues and income of the most prominent members of this elite group. 

However, they rarely mention that these gains largely stem from the illusion of the low-base effects.

In reality, these exciting profit gains represent only a small fraction of the increases in debt. 

In the first semester, the published net income of the PSEi 30 rose by a modest 4.36%, or Php 20.4 billion, reaching the second-highest level of Php 487.12 billion. 

Yet, this growth rate marks the slowest increase since 2021. (Figure 2, middle image) 

Net income of non-financial companies grew by 2.03%, with one-third of these companies experiencing a decline in profits.

Meanwhile, the headline performance was primarily driven by the big three banks, whose profit growth of 15.4% significantly boosted the overall.

In context, the non-bank debt growth of 5.9% eclipsed the PSEi 30’s net income growth of 4.36%. 

Crucially, the net debt growth of Php 308.5 billion represents a staggering 15.2 times the net profit increase of Php 20.4 billion! Fifteen times! An all-time High! (Figure 2, lowest pane)

Strikingly, as a proportion of income, the net debt growth of Php 308.5 billion accounted for 63% of the aggregate net income of Php 487 billion in the first semester! 

Essentially, this demonstrates the law of diminishing returns in action: while debt used to be a significant contributor to (demand) revenue and income growth, malinvestments have resulted in corrosive effects. 

Worse yet, unbeknownst to the public, this marks a substantial buildup in credit risks, channeled through balance sheet mismatches of the nation’s largest firms. 

Amazing. 

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example

Another cautionary note is that elite firms may be prone to exaggerating their top and bottom lines to convincingly portray their financial viability to the public.

Furthermore, "errors" could also be a factor, reminiscent of the PLDT's 4-year "budget overrun" debacle. Local authorities drew a veil over the reporting fiasco of the largest telecommunications company and allowed them to escape unscathed, despite the company settling with plaintiffs of a class action suit for a paltry sum of USD 3 million. 

In our humble opinion, the PLDT case exemplifies the decay of corporate governance, where elite companies can evade accountability for misdeclarations (whether accidental or intentional). 

Instead of being transparent, they may choose to pay small fines, raising the question: what would prevent other elite companies from following suit?

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications

Figure 3

Meanwhile, corporate revenues grew by 8.71% in the first semester (1B). Non-bank PSEi 30 expanded by 7.4% while bank revenue growth of 24.2% delivered the gist of the PSEi 30’s semestral expansion. (Figure 3, table)

Twenty-three of the 30 constituents posted positive YoY growth while seven saw a contraction. In pesos, San Miguel was the leader with an increase of Php 103.8 billion followed by JGS with Php 24.8 billion, BDO and BPI with Php 24.1 billion and Php 23.1 billion respectively.

1H revenue growth of 8.71% resonated with its equivalent in (nominal) GDP of 9.5%.  If the GDP numbers are close to accurate then PSEi 30’s share of revenues amounted to 27.8% of the NGDP. 

Yes, 30 firms accounted for over a quarter of the statistical economy in 2024.

And that's only the 30 firms—a hallmark of the trickle-down, plutocratic political-economic structure.

The slowing NGDP and PSEi 30’s revenue growth are symptoms and manifestations of the corrosive nature of the BSP’s inflationism, expressed through over-indebtedness and price instability, which negatively impact profits and liquidity.

Importantly, because this increases the public’s time preferences or short-term orientation, the public becomes inclined toward activities that cater to instant gratification, such as speculation and gambling.

This inclination also permeates into the political spectrum, raising the public’s desire for more interventions and resulting in the deepening politicization of the socio-economic sphere.

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

This leads us to the fourth component: cash.

It is no surprise that the mounting imbalance between profits and debt has resulted in deepening signs of illiquidity, as the cash reserves of the PSEi 30 constituent firms continue to decline. (Figure 3, lower visual)

In addition to borrowing, PSEi 30 corporations have partially used their cash reserves to bridge the liquidity gap in their financing operations.

Yet, despite the massive borrowings, the aggregate cash reserves (1A) have fallen to their lowest level since 2021, with 14 of the 30 firms posting cash contractions.

Aboitiz Equity and gaming company Bloomberry recorded the largest cash decreases, while Meralco and LTG registered the most significant gains.

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

San Miguel’s situation appears to be a poster child for the entropic process leading to illiquidity and insolvency.

Despite the astonishing Php 147 billion surge in borrowing from the first semester of 2023 to 2024, and a published net income of Php 13.6 billion, SMC’s cash reserves fell by Php 8.31 billion to Php 253.9 billion—its lowest level since 2018. (And that’s assuming that the reported cash reserves are accurate)

Why wouldn’t it?

Figure 4

Short-term debt skyrocketed from Php 363.8 billion in 1H 2023 to Php 533.67 billion in 1H 2024, an increase of Php 169 billion! (Figure 4, topmost chart)

Both the level of short-term debt and the annual increase in short-term debt are all-time highs!

More importantly, SMC’s short-term debt now exceeds 100% of its cash reserves!

Additionally, interest payments, which amounted to Php 24.12 billion and counting, have not been included in this analysis.

In context, SMC’s Php 1.484 trillion in debt represents about 4.6% of the Php 32.33 trillion in total financial resources and 5.9% of the 2024 annualized Php 25.2 trillion NGDP! (Figure 4, middle and lowest charts)

Incredible.

In simple terms, SMC needs to generate funds to pay or refinance both its massive short-term and long-term obligations.

Rising interest payments will further erode its profits.

With vastly insufficient profits and cash flows, SMC will naturally have to draw on its most liquid reserves: cash.

The company may also need to increase its borrowing rate or resort to selling assets or dilute its equity to meet its operational liquidity requirements.

Keynesian economist Hyman Minsky theorized the transition from financing stability to instability phenomenon as "Ponzi Finance."

Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts. (Minsky 1992)

Regardless of interest rates, SMC’s debt stock has reached a fragile state, increasingly vulnerable to a bout of perilous illiquidity. 

If SMC cannot raise the required amount, it may exhaust all its cash or, alternatively, embark on a selling spree of its assets or dilute its equity.

New ventures like the Bulacan-based New Manila International Airport (NMIA) project are unlikely to generate sufficient cash flows to meet its skyrocketing obligations.

However, in our humble opinion, the company must convince the public that it is viable enough to continue with its borrowing orgy. 

Yet, what happens at SMC will not stay at SMC. A "tail event" for San Miguel could send shockwaves through the banking system, financial markets, and the broader economy—which relies on elite firms for GDP growth.

Of course, we would expect the BSP or the government to mount a bailout. However, doing so could accelerate other negative feedback loops in the financial system.

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

The PSEi’s mounting liquidity shortage has been mirrored in the banking system.

Figure 5

In the first semester, cash growth among listed banks increased by a mere 1.82% year-over-year (boosted by the big three of the PSEi 30 at 3.36%), while bills payable soared by 39.2% across all banks, driven higher by a 68.12% surge from the PSEi 30’s big three. (Figure 5, table) 

Nota Bene: BPI categorizes its borrowing under "Other borrowed funds," making the time element of its debt distribution ambiguous and therefore not included in our data. 

In any case, universal-commercial (UC) banks have ramped up their borrowing activities, with bills and bonds payable growing at accelerated rates of 40.62% and 11.78%, respectively, resulting in a total increase of 27.8% as of June. (Figure 5, middle graph) 

UC bank borrowings in pesos reached an all-time high of Php 1.401 trillion last June! 

UC banks have not only increased their borrowing but have also shifted focus to short-term debt, reflecting the industry’s deteriorating liquidity conditions. 

The long-term decline in cash-to-deposits and liquid assets-to-deposits ratios continued in June. (Figure 5, lowest diagram) 

Bank client issues are also reflected in the banks' health reflecting on liquidity conditions—despite the accounting charade surrounding Held-to-Maturity (HTM) assets and various relief measures that have obscured the actual conditions of Non-Performing Loans (NPL).

If banks are as profitable as claimed, why is financial liquidity deteriorating and why are borrowings at record levels? 

IX. PSEi 30 1H Analysis: A Concise Industry Overview

Figure 6

By industry, debt grew the most in the holding sector, while the property sector came in a distant second in the first semester. (Figure 6, top table)

The holding sector accounted for the largest share representing 74%, while the property sector 11%.

Similarly, banks generated the most significant net income gains, followed by the service sector.

Banks' net income comprised 61.6% of the total or the PSEi 30’s net income, while services had a 28% share.

The holding sector dominated revenue growth, with a share of 54.7%, while banks accounted for 21.9%.

Cash increased the most in the industrial sector, with banks in second place.

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

Moving to the second quarter, "Marcos-nomics" powered the GDP growth of 6.3%.

The poor top-line performance of several PSE-listed firms, which have reported their Q2 2024 results, underscores this issue.

… 

Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Prudent Investor 2024) 

This context is further validated by examining the revenues and net income of the 30 elite companies in the PSEi 30, some of which are even involved in government projects. 

Whereas Q2 NGDP grew from 9.1% in Q2 2023 to 10.1% in Q2 2024, the PSEi 30’s gross revenues climbed from 8.24% to 9.14% over the same period, despite the significant increase in debt. (Figure 6, lower graph) 

Similar to the first half of the year, Q2 revenues of the elite firms, amounting to Php 1.799 trillion, signified 28% of the Q2 NGDP, which stood at Php 6.486 trillion—once more, the trickle-down, plutocratic political economy. 

Revenues grew, but there is a catch. 

The net income of the PSEi 30’s non-bank firms showed a slight decline of 0.13% year-over-year. 

However, the bank's net income, which expanded by 13.7%, boosted the aggregate net income growth to 2.35%. This figure represents gross net income.

Figure 7

Alternatively, the real net income for the PSEi 30 stagnated or even contracted by -1.45% in Q2 2024! That’s right; net income shrank. (Figure 7 top and bottom tables) 

Outside the banking and property sectors, there was hardly any increase in net income in real terms. 

Net income for thirteen of the PSEi 30 firms (43%) decreased in Q2. Semirara, DMC Holdings, GT Capital, JG Summit, and Bloomberry led this decline. 

Conversely, Ayala Corp, SM Investments, ICT, and Meralco led the gainers.

In the meantime, SMC and Meralco posted the most significant revenue gains, while DMC and Semirara experienced revenue contraction.

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

In line with global stocks, the PSEi 30’s relentless climb toward the 7,000 level has been primarily driven by the local version of the "national team" and supported by foreign funds, thanks to the "Powell Pivot" towards easier monetary conditions.

While this surge has largely been driven by price-multiple expansion or speculation, it has overlooked critical concerns that have been festering beneath the surface.

Or, stocks have departed from the ongoing stagnation in fundamentals.

However, if higher interest rates did not put a brake to the government's and the PSEi 30's insatiable debt absorption and immersion, easier money conditions will surely intensify it.

What could possibly go wrong?

___

References: 

Ludwig von Mises, OMNIPOTENT GOVERNMENT THE RISE OF THE TOTAL STATE AND TOTAL WAR, p.251; 1944 & 2010, Mises Institute, Mises.org

Prudent Investor Newsletter, Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy, May 19,2024

Hyman P. Minsky, The Financial Instability Hypothesis, p.7 Levy Economics Institute, May 1992, levyinstitute.org

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024 

 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

 

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong—George Soros 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

The ABS headline bannered, “PSEI back to 6,800 as investors cheer BSP rate cut.”

Figure 1

Well, the entire Asian equity market seems to have celebrated the rising expectations of rate cuts by the US Federal Reserve. In particular, 15 of the 19 national bourses closed 1.96% higher over the week. (Figure 1, upper chart)

The wonders of financial easing have also been manifested in strong rallies in the region’s bonds (falling yields) and firming currencies. The Thai baht, Indonesian rupiah and the South Korean won were this week’s strongest Asian FX. (Figure 1, lower image) 

Essentially, bad economic news is good news for the Overton Window anchored on speculative narratives. From their perspective, “MOAR” credit and leverage drive prosperity, hence the revival of various forms of leveraged speculation, such as the carry trade. 

Put differently, Main Street woes accrue to the benefit of the Wall Street class around the world. 

Has the Marcos-nomics Liquidity Driven Rally Broken the SONA Cycle?

Back home, while the BSP rate cut(s) has been worshipped by the establishment as the path to economic nirvana, the rallying PSE instead reflects the full rollout of “Marcos-nomics”—including the BSP’s easing—manifested through liquidity growth.

Figure 2

The PSEi 30 rallied by 3% for its second-best weekly showing of the year, mainly due to Friday’s 2.31% spike.

Sharp changes in liquidity conditions have influenced the PSEi 30 in a time-lag. (figure 2, upper graph) 

The liquidity-driven PSE may have broken the SONA cycle. (Figure 2) 

However, was the PSEi 30’s rally really about rate cuts? The devil is always in the details. 

PSEi 6,850: Targeted Heavy Pumps on ICT, ALI and a Select Few

Figure 3

This week’s rally was widespread across the PSEi 30, with 18 stocks rising, 11 declining, and one remaining unchanged. (Figure 3, topmost visual) 

However, it was ICTSI’s [PSE: ICT] massive 10.4% weekly surge that contributed significantly to the index’s performance. (Figure 3 middle chart) 

ICT's share of the free float-adjusted market cap of the PSEi 30 soared by 7.7% from 10.06% to an all-time high of 10.84%. It is closing in fast on the largest firm, SM, with a free float cap of 14.44%. 

Ayala Land's [PSE: ALI] 10.33% gain provided flanking support. Ayala Land's free float market cap also surged by 7.6% from 5.75% to 6.19%. 

The substantial rebounds of Jollibee (9.2%) [PSE: JFC] and Meralco (8.53%) [PSE: MER] helped too. Up 19%, Converge [PSE: CNVRG] was this week's best performer. However, from the free float market cap standpoint, their contribution remained negligible. (Figure 3 lowest graph)

Understanding the distribution of price changes in the PSEi 30's market cap provides significant insight into the price dynamics of the index.

For instance, while most people call the PSEi 30 the "market," an index with 5 issues driving it skews this holistic principle. As of August 16, the top 5 issues in the PSEi 30 carry a free float weight of 50%, while the top 10 account for 72.9%.

The fact that a few issues comprise the weightings of the PSEi 30 deforms the index's representation, making its price directional movements vulnerable to manipulation.

As a Global Company, ICT is Sensitive to Fed Actions; Debt Outgrows Income

Why would the investing public panic-bid on ICT shares when its revenues are principally derived from international sources? ICT is more exposed to the Fed's actions than the BSP's.

Figure 4

And why the parabolic price action when ICT’s debt is growing faster than its income? In H1 2024, ICT’s debt grew by USD 630.6 million against a net income expansion of USD 113.87 million, meaning that for every USD increase in net income, it drew USD 4.5 of credit. Consequently, interest payments have also surged. How sustainable is this? (Figure 4, topmost window)

Besides, ICT looks susceptible to adverse global events like a hard landing or a recession, as well as bellicose geopolitical developments.

Rate Cuts Driven Rally? Why the Divergence Between the Real Estate and Financials?

Interestingly, while banks and real estate are supposedly the prime beneficiaries of the BSP’s easing, BDO declined by 1.6%, and the relatively modest increases in Bank of the Philippine Islands [PSE: BPI] by 2.12% and Metrobank [PSE: MBT] by 3.7% led to a reduction in their share of the free float index.

On the other hand, ALI’s 10.33% spike, backed by SM Prime Holdings [PSE: SMPH] with a 3.4% gain, increased their index weight. The result is a divergence in the performance of interest-sensitive industries. (Figure 4, middle chart)

It’s not just the PSEi 30; members of the financial index (ex-PSE) and the property index also exhibit the same skew. Gains were seen in most constituents of the Property index (67%, average +1.47%) compared to the Financial index (42%, average all -.43%, average index -2.6%).  (Figure 4, lowest table)

Interestingly, the two PSEi 30 property firms account for 73.7% of the industry’s index, while the three banks comprise 90% of the 8-member Financial index (ex-PSE).

Distortions in Volume: Mounting Concentration Risks

Figure 5

The distortions are even apparent in trading volume. The rising share of ICT and the telcos (PLDT, Globe Telecoms, and Converge) in the mainboard volume has been accelerating, indicating intensifying speculative interest. Their share of the mainboard volume reached 22.25% in the week of August 16th, higher than their 2024 seven-month aggregate of 21.9%. (Figure 5, upper graph) 

Interestingly, despite the PSEi 30 at 6,850, weekly volume remained lackluster. That is to say, volume remained concentrated in PSEi 30 firms. The top 20 most active issues accounted for 84% of the main board volume. (Figure 5, lower chart)

Mixed Breadth, Foreign Inflows and More Signs of Concentrated Activities

Figure 6

And while the positive advance-decline prevailed at the PSEi 30 over the week, even with Friday's 134-68 differentials, breadth was barely positive (495-476) in favor of the buyers this week. (Figure 6, upper pane)

And yes, "foreign buying" indeed helped. PHP 1.44 billion of foreign inflows was reported for the week, while foreign participation accounted for 38.8% of the overall main board turnover.

The top 10 brokers also constituted 54.74% of the weekly mainboard volume.

All of this suggests that trades were hardly dispersed but rather concentrated, mainly among institutional brokers (domestic OFCs and foreign).

Or, the positive headlines may have misled the public to believe in whatever increases in the PSEi 30 means relative to the underlying activities.

Which History will Rate cut(s) Rhyme? 2011 or (2016) or the 2018 Episode?

Finally, as previously mentioned, unlike in 2011 and 2016, where rate cuts led the PSEi 30 to soar, 2018 saw the reverse—rate cuts led to a decline in the PSEi 30. Balance sheet conditions (public and private) played an important role in this difference. So far, the PSEi 30 appears to be following the 2016 pattern in its current run. Of course, Marcos-nomics stimulus could be the defining nuance.  (Figure 6, lowest chart)

Yet it will be interesting to see how lasting such low-volume parabolic pumps last.

Be careful out there.