BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

 

The short end of the UST curve is highly influenced by the Federal Reserve’s monetary policies while the long end clarifies those policies through the prism of risk/return. A steep yield curve…is one that suggests a low rate, accommodative monetary policy that is likely to work over time. This accounts for the curve’s steepness. A flat and inverted curve is the opposite. Whatever monetary policy is being conducted, the long end is interpreting that policy as well as other conditions as being highly suspect—Jeffrey P Snider 

In this issue:

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion!

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion? 

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion! 

The Philippine yield curve inverts as the BSP significantly reduces the Bank RRR, while the US Fed embarks on a "Not in Crisis" 50-bps rate cut. 

The BSP has been telegraphing cuts to the banking system’s Reserve Requirement Ratio (RRR) since its last reduction in June 2023. 

For instance, Philstar.com, May 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking at a significant reduction in the level of deposits banks are required to keep with the central bank after it starts cutting interest rates this year, its top official said. BSP Governor Eli Remolona Jr. said the Monetary Board is planning to cut the reserve requirement ratio (RRR) of universal and commercial banks by 450 basis points to five percent from the existing 9.5 percent, the highest in the region. 

Four months later. 

GMANews.com, September 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking to cut the reserve requirement ratio, the amount of cash a bank must hold in its reserves against deposits, “substantially” this year and reduce it further in 2025. BSP Governor Eli Remolona Jr. said on Wednesday that the cut in the reserve requirement is being considered, with the timing being discussed. He earlier said this can be reduced to 5% from the present 9.5% for big banks. 

Two days after. 

ABSCBNNews.com, September 20, 2024: The Bangko Sentral ng Pilipinas is reducing the reserve requirement ratio (RRR) for universal and commercial banks by 250 basis points (bps).  This RRR reduction will also apply to non-bank financial institutions with quasi-banking functions, the BSP said… The reduction shall bring the RRRs of universal and commercial banks to 7 percent; digital banks to 4 percent; thrift banks to 1 percent; and rural and cooperative banks to zero percent, the central bank said. The new ratios take effect on October 25 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs. (bold mine) 

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity 

Bank lending growth has been accelerating, while broad economic liquidity measures have been rising, so why would the BSP opt to inject more liquidity through Reserve Requirement Ratio (RRR) cuts? 

The following data set may provide some answers.

Figure 1

Although lending by Universal and Commercial Banks is at a record high in nominal peso terms, the growth rate remains far below pre-pandemic levels. (Figure 1, topmost image) 

The RRR cuts from 2018 to 2020 appeared to have worked, as the loans-to-deposit ratio rose to an all-time high in February 2020 but the pandemic-induced recession eroded these gains. (Figure 1, middle graph) 

It took a combination of historic BSP policies—record rate cuts, an unprecedented Php 2.3 trillion liquidity injection, and extraordinary relief measures—to reignite the loans-to-deposits ratio. Nonetheless, it still falls short of the 2020 highs. 

A likely, though unpublished, explanation is that bank liquidity continues to decline. 

As of July, the cash and due-to-bank deposits ratio was at its lowest level since at least 2013. The BSP policies of 2020 and subsequent RRR cuts bumped up this ratio from 2020-21, but it resumed its downtrend, which has recently worsened. (Figure 1, lowest chart)

Figure 2

After a brief recovery from the RRR cuts of 2018-2020—further aided by the BSP’s historic rescue measures in 2020—the liquid assets-to-deposits ratio has started to deteriorate again. (Figure 2, topmost pane) 

Additionally, Q2 2024 total bank profit growth has receded to its second-lowest level since Q2 2021. (Figure 2, middle diagram) 

From this perspective, liquidity boost from increased bank lending, RRR cuts, and reported profit growth has been inadequate to stem the cascading trend of cash and liquid assets. 

Furthermore, despite subsidies, relief measures, and a slowing CPI, Non-Performing Loans (NPLs) and distressed assets appear to have bottomed out in the current cycle. (Figure 3, lowest visual) 

Increasing NPLs in the face of a slowing CPI is indicative of demand. Refinancing has taken a greater role in the latest bank credit expansion. 

To wit, rising NPLs contribute significantly to the ongoing drain on the banking system’s liquidity. 

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

Figure 3

A primary source of the downtrend in the cash-to-deposits ratio has been the banking system's Held-to-Maturity (HTM) securities. (Figure 3 upper image)

Once again, the BSP has acknowledged this. 

Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtM losses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity. [BSP, 2018] (bold mine) 

Even though rates have dropped, HTM (Held-to-Maturity) assets remain at record levels but appear to be plateauing. Falling rates in 2019-2020 barely made a dent in the elevated HTM levels at the time. 

Yet, a principal source of HTMs continues to be the bank's net claims on central government (NCoCG). (Figure 3, lower graph) 

That is, banks continue to finance a substantial portion of the government's deficit spending, which has represented an elementary and major contributor to the deterioration in bank liquidity. 

Why has the BSP been doing the same thing over and over again, expecting different results? Some call this "insanity." 

If the goal is to remove distortions—however ambiguously defined—why not eliminate the RRR entirely? 

It seems the BSP is merely buying time, hoping for a magical transformation of unproductive loans into productive lending. Besides, a complete phase-out of the RRR would leave the BSP with fewer "tools," or bluntly speaking, strip them of excuses. 

Thus, they’d rather have banks continue to accumulate unproductive loans in their portfolios and gradually subsidize them with relief from RRR cuts, rate cuts, various subsidies, and later direct injections—a palliative/band-aid treatment. 

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion! 

Figure 4

Rather than steepening, the Fed's "not in a crisis" panic 50-basis-point cut also helped push the Philippine Treasury yield curve from an "inverted belly" to a "full inversion" on September 20! (Figure 4, tweet)

Figure 5

While yields across the entire curve plunged over the week, T-bill yields declined by a lesser degree relative to medium- and long-term Treasuries. (Figure 5, topmost window)

As a result, yields on Philippine notes and bonds have now fallen below T-bills!

Although one day doesn’t make a trend, this current inversion is the culmination of a process that began with a steep slope, then an inverted belly, and now a full inversion since June 2024. (Figure 5, middle chart)

The spreads between the 10-year bonds and their short-term counterparts are at the lowest level since March 2019! (Figure 5, lowest graph) 

And an inverted curve could serve as a warning signal/alarm bell for the economy.

From Investopedia: 

>An inverted yield curve forms when short-term debt instruments have higher yields than long-term instruments of the same credit risk profile.

>The inverted curve reflects bond investors’ expectations for a decline in longer-term interest rates, a view typically associated with recessions.

Further, it is a sign of tight liquidity: short-term borrowing costs rise or remain elevated, leading to higher yields on short-term debt instruments compared to long-term yields.

Moreover, expectations of slowing growth or economic recessions can also lead to decreased demand for riskier assets and increased demand for safer long-term bonds.

Again, the inverted curve must have resulted from the BSP’s announcement of a sharp reduction in the RRR in October, along with the Fed’s 50-basis point rate cuts.

Bottom line: cuts in the banks’ RRR were meant to address the banking system’s liquidity challenges as manifested in the Philippine treasury markets. The Fed’s 50-bps rate cut has exacerbated these distortions.

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion?

Figure 6

Finally, it is interesting to observe that following the PSEi 30's intraday push above 7,300 last Friday, September 20, foreigners sold off or "dumped" SMC’s shares by 5% during the pre-closing five-minute float, contributing to the sharp decline in SMC’s share price and diminishing gains for the PSEi 30. (Figure 6, tweet) 

While we can’t directly attribute this to the inversion of the Philippine term structure of interest rates (yield curve), SMC’s intensifying liquidity challenges—evidenced by deteriorating cash reserves relative to soaring short-term debt in Q2 2024—should eventually influence its slope. (Figure 6, lower chart) 

In sum, as a "too big to fail" institution, SMC’s difficulties will inevitably reflect on the government’s fiscal and monetary health as well as the banks and the economy. 

____

references

FINANCIAL STABILITY COORDINATION COUNCIL, 2017 FINANCIAL STABILITY REPORT, p. 24 June 2018, bsp.gov.ph

US Federal Reserve Powell’s 50 bps Rate Cut: A Case of Panic or Politics?

  

"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."—Mark Spitznagel

US Federal Reserve Powell’s 50 bps Rate Cut: A Case of Panic or Politics?

Was Federal Reserve’s Jerome Powell’s 50-basis-point rate cut a data-driven economic response, or was it aimed at tilting the presidential election odds in favor of the Democrats?

The U.S. Federal Reserve began its rate-cutting cycle with a surprise 50-basis-point reduction on September 18, 2024.

Figure 1

Historically, or based on the Fed's interest rate cycle, economic recessions or financial panics have often followed the Fed's interest rate cuts, a pattern that has been consistent since the 1970s.

In the present episode, as US stocks have been rocketing to establish back-to-back milestone highs. However, this supposedly presage a "long-term bull market," rather than a temporary spike—anchored on the popular rationale for a forthcoming economic slowdown that would signify a "soft landing."

The spillover effects of the easy money regime have not been limited to the US but global in scale.

Figure 2

US officials could be sugarcoating the current economic conditions. From a labor perspective, unemployment rates inevitably rise after the rate-cutting cycle begins. (Figure 2, upper window)

According to Mises Institute's chief editor Ryan McMaken: 

if one looks closely, one will not find a case of the FOMC slashing the target interest rate by 50 basis points when the economy “is in great shape.” On the contrary, a 50 bps (or larger) cut to the target rate tends to come just a few months before recession and a rising unemployment rate. If one looks only at the unemployment rate in these cases, one could see how the economy might look decent even when the Fed starts a rate-cutting cycle. Over the last thirty years, 50-basis-point panic cuts come when the unemployment rate is barely up from recent lows. 

Uncannily, the last time the Fed initiated a series of rate cuts with a 50-basis point reduction was on September 18, 2007. 

Like today, as pointed out in a thread on x.com by analyst Sven Henrich, US stock markets raced to their all-time highs while the notion of a soft landing permeated the landscape. (Figure 2, lower tweet) 

However, a recession began in December 2007, just three months later. 

This recession was not officially recognized until well into 2008, even as the Fed denied it in February of that year.

Figure 3

The S&P 500 $SPX soared by 6% in about a month to reach a new zenith. Yet, one and a half years later, the SPX plummeted by 57%, hitting its trough in March 2009. (Figure 3, upper chart)

As a side note, mirroring trends in the U.S., the Philippine PSEi 30 rocketed by 17% in less than a month to an all-time high of 3,873.5 on October 8, 2007, before crashing by 56% just over a year later.

On the other hand, the Fed has opened the 2024 cycle with a "panic" 50-basis point rate cut even when financial conditions have been the easiest since at least September 2023, according to Goldman Sachs calculations. (Figure 3, lower graph)

This means the Fed has opened the liquidity spigot even while U.S. (and global) stocks are experiencing a record-breaking winning streak accompanied by unprecedented levels of debt!

The transmission mechanism has been expressed in different economic spheres.

Figure 4 

As Bank of America’s Savita Subramanian observed, “We believe the key difference between this easing cycle and past cycles is the profits trajectory. Historically, profits have almost always been decelerating as the Fed first cuts rates, but that’s not the case today” (Figure 4, upper chart)

Of course, loose monetary conditions tend to spill over not just into share prices but also through various economic channels, partly via profit expansion (wealth effect).

Furthermore, as Credit Bubble Bulletin’s analyst Doug Noland noted, Unrelenting growth in government debt, intermediated through “repos,” the money market fund complex, the Securities Broker/Dealers, and the Rest of World (ROW). Unprecedented speculative leverage that creates both demand for securities and liquidity for asset inflation and history’s greatest Bubble. A historic Bubble in government debt issuance that has fueled asset Bubbles and resulting massive inflation in perceived household wealth, along with ongoing elevated incomes and spending. (bold mine)

So why would the Fed cut rates when current monetary conditions are easy?

U.S. presidential contender Donald Trump believes that Powell’s rate cut was a "political move."

Last June, Mr. Trump stated that he would not reappoint Jerome Powell.

Putting pressure, days before the interest rate decision, three Democratic leaders urged the Fed to implement a 75-basis point decrease.

By boosting the markets and delaying an economic slowdown, this move could increase the odds of a Democratic victory for President Biden's anointed Kamala Harris.

Has Powell thrown his lot with the Harris-Walz ticket to secure his reappointment?

For a non-partisan observer, will Powell’s panic cut result in a "this time is different" "soft landing?"

Or, is it merely delaying an inevitable economic reckoning? 

In the end, the USD price of gold sprinted to an all-time high. (Figure 4, lowest tweet)

Is this milestone driven by a mounting #FOMO among emerging market central banks? Is it a safe-haven response to the escalating Israel-Palestine war, Israel-Hezbollah war, or a broader war theater in the Middle East? Is it also factoring in global central banks trapped in their easy money policies, which have accelerated speculative mania and intensified systemic leverage?

We are living in interesting times. 

 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

What's been lost in this frenzied competition for eyeballs and "likes" is the distinction between opinion and journalism. The post-truth cliche is that there is no distinction, that everything is mere opinion and spin, but this is not true: journalism is different from opinion and spin—Charles Hugh Smith 

In this issue

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?"

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30?

VI. The Unannounced "Historic Moments" 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window 

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?" 

Along with the region's sanguine performance, the Philippine PSEi 30 broke past 7,000. Could this signify the start of a bull market, as the media and consensus have suggested?

Figure 1

Businessworld, September 13: The PSEi achieved a significant milestone, closing above 7,000 for the first time in over 19 months. Strong foreign buying and expectations of a US Federal Reserve rate cut contributed to this historic moment. (Figure 1, upper picture) 

Historic. Moment. 

Sure, the PSEi 30 has traded above 7,000 for the last five days and closed above this threshold in the last two. However, how is reaching a 19-month high equivalent to a "historic moment?" 

Media is said to reflect the prevailing mood or express the public’s level of confidence. That’s according to the practitioners of ‘Socionomics.’ 

Could this headline be indicative of the market’s mood? 

Let’s examine public sentiment by analyzing the market internals. 

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops 

Foreign buying was certainly a factor. 

This week, aggregate net foreign inflows amounted to Php 2.7 billion, marking the fifth consecutive week of net buying and the second-largest inflow during this period. (Figure 1, lower diagram) 

However, foreign inflows accounted for only 41.44% of the average weekly turnover, the lowest in five weeks. 

This suggests that local investors have begun to dominate the transactions on the Philippine Stock Exchange (PSE). 

Additionally, the scale of weekly foreign investment was far from record-breaking.

As a side note, in today’s digitally connected, "globalization-financialization" world, foreign inflows could also include funds from offshore subsidiaries or affiliates of local firms.

Figure 2

Sure, expectations of the US Federal Reserve's interest rate cuts have not only fueled a strong rebound in ASEAN currencies but have also energized speculative melt-up dynamics in the region's equity markets, driven by foreign players. 

ASEAN currencies outperformed the global market from July 10 (following the US CPI release) through September 11. (Figure 2, topmost table) 

Yahoo Finance/Bloomberg, September 12: Southeast Asian equities have cemented their position as a favorite play of money managers positioning for the Federal Reserve’s policy pivot. Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading the pack. The buying frenzy has put foreign inflows on track for a fifth consecutive week while the MSCI Asean Index is now trading near its highest level since April 2022. [bold added] (Figure 2, lowest chart) 

Moreover, the yield-chasing phenomenon has spilled over into the worst-performing equities, or the laggards of the region. 

Yahoo Finance/Bloomberg, September 12: After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favor. The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September. Their benchmarks have risen at least 3% each so far, even as MSCI Inc.’s gauge of global stocks has fallen about 1% following a four-month winning streak. Investor focus seems to be shifting as the world’s biggest equity markets such as the US, Japan and India take a breather, and China’s slump deepens. For many of the smaller Asian markets, a limited exposure to the artificial intelligence theme means their valuations aren’t expensive, making them attractive just as the Federal Reserve’s dovish pivot helps boost their currencies and allows some central banks to embark on rate cuts. [bold added] 

The "core to the periphery" phase indicates that investors have been pursuing yields in less developed and less liquid markets, which are inherently more volatile and considered higher risk. This shift could signify a late-cycle transition. 

So yes, while there may be a semblance of increased confidence due to foreign participation, this dynamic appears to be limited to the most liquid and largest market capitalization issues—those capable of absorbing significant trading volumes.

And that’s exactly the case. Except for last week’s drop to 81%, the percentage share of the 20 most traded issues relative to the main board volume has risen in tandem with the PSEi 30 since mid-June. (Figure 2, lowest image)

That is to say, the PSEi 30’s performance was largely driven by concentrated trading volume in a select group of elite stocks.

Figure 3

Using the BSP’s portfolio flow data, July’s portfolio flows represented the largest since April 2022. (Figure 3, topmost image)

However, the larger point is that foreign money flows tend to chase the peaks of the PSEi 30.

In fact, foreign investments often surged during the culminating (exhaustion) phase of the PSEi 30’s upward momentum, a pattern observed since 2013.

Will this time be different?

It’s important to note that the BSP’s portfolio flows include foreign transactions in the fixed-income markets, but the size of these flows is relatively insignificant.

In a nutshell, the purported confidence brought about by foreign participation has been largely limited to the PSEi 30. 

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

Does media sentiment resonate with the PSE’s market breadth?

In a word, hardly.

The PSEi 30 rose by 1.25%, marking its second consecutive weekly advance and its ninth increase in 12 weeks since this upside cycle began in the week ending June 28th.

This week’s rebound pushed its year-to-date returns to 8.88%.

While we have seen some substantial returns due to heightened volatility in some of the PSEi 30's underperformers, such as Converge (+10.5%), Aboitiz (+8.4%), and Bloomberry (+8.3%), it was the performance of the two largest market capitalization stocks, SM (+3.47%) and ICT (+2.75%), that drove this week’s free-float gains. (Figure 3, middle pane)

The PSEi 30’s average return was 1.03%. The difference between this figure and the index reflects distortions caused by free-float weighting.

Yet, the increasing volatility in the share prices of several PSEi 30 and non-PSEi 30 firms suggests the formation of miniature bubbles.

With a 17-13 score, decliners outnumbered gainers in the PSEi 30, indicating a divergence between market breadth and the headline index.

Despite reaching the “historic moment” of the PSEi at 7,000, market breadth continues to weaken. (Figure 3 lowest chart)

Declining issues have outpaced advancing issues for the second consecutive week, with the 69-point margin nearly double last week’s 37. Declining issues led the market in all five trading sessions.

Figure 4

Yet, the market capitalization weighting of the top five issues rose from last week’s 51.15% to 51.34%, primarily due to ICT’s increase from 10.83% to 10.99%. (Figure 4, topmost chart)

Or, 5 issues command over half the PSEi 30 price level!

This week’s pumping of the PSEi 30 pushed ICT’s share price to a record high of Php 418.6 on Thursday, September 12th. (Figure 4, middle graphs)

To put it another way, ICTSI has shouldered most of the burden in pushing the PSEi 30 to 7,000.

Additionally, ICTSI's rise has been supported by rotational bids of the largest banks, SM, SMPH, and ALI (the six largest), which is publicly shaped by media and the establishment narratives through the promotion of BSP and US FED easing as beneficial to stocks and the economy.

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment.

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume 

Does the market’s volume corroborate the media’s exaltation of the PSEi reaching 7,000?

Succinctly, no.

To be sure, main board volume surged by 22%, increasing from an average of Php 4.9 billion to this week’s Php 5.9 billion. (Figure 4, lowest image)

However, main board volume remains substantially lower than the levels observed when the PSEi 30 previously reached the 7,000-mark.

Figure 5

Moreover, despite a 4.2% monthly surge in August that pushed year-to-date returns (January to August) to 6.94%, the eight-month gross volume fell to its lowest level since at least 2012. (Figure 5, topmost visual)

That’s in addition to the disproportionate share weight of over 80% carried by the top 20 issues on the main board volume, as noted above.

Incredible, right?

But there’s more. 

The main board volume consists of:

-Client-order transactions

-Dealer trades (usually day trades)

-Cross-trades (trades from clients in the same broker)

-Done-through (intrabroker/broker subcontract) trades 

Last week, the top 10 brokers controlled 53.84% of the main board volume, averaging 56.75% since the end of June.

Or, concentration in trading activities has also been reflected in the concentration of broker trades.

The point is, what you see isn’t always what you get.

Main board (and gross) volume doesn’t necessarily reflect broader public participation.

The sharp decline in direct participation by the public in 2023 underscores this reality. The PSE’s active accounts comprised only 17.6% of the 1.9 million total accounts in 2023—the lowest ever. (Figure 5, middle image)

Instead, trades within the financial industry have played a significant role in the PSE’s overall turnover.

For instance, in Q1 2024, the BSP noted that claims of Other Financial Corporation (OFC) on the other sectors "grew as its investments in equity shares issued by other nonfinancial corporations," and also “claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares”

Have OFCs been a part of the national team? OFCs include bank subsidiaries, public and private insurance and pension firms, investment houses, et.al. (BSP, 2014)

Why would the PSE’s volume endure a sustained decline if there has been significant savings to support the alleged increase in public confidence?

Historic? Hyperbole. 

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30? 

Finally, why would everyone discount, dismiss, or ignore the brazen "pumps-and-dumps" and "pre-closing price level fixing" at the PSE?

In the last five days, managing the index level involved early ICTSI-fueled pumps, aided by frenetic rotational bids on the other top five to six market caps. (Figure 5, lowest images)

After surpassing 7,000-level intraday, the local version of the "national team" dumped their holdings—using the 5-minute pre-closing float—onto unwitting foreign and retail buyers.

Despite this, the PSEi 30 managed to close above the 7,000 level during the last two days—albeit on low volume, with negative market breadth and concentrated trading activities.

Still, does everyone believe that the mounting distortions in the prices of (titles to) capital goods will come without consequences for the financial markets and the real economy?

What happened to the army of analysts and economists? Has the fundamental law of economics escaped them?

Or does the management of the PSEi 30 levels represent part of the establishment’s manipulation of the Overton Window?

Sure, the mainstream media has been so desperate to see a "bull market" that they describe a 19-month high as a "historic moment."

However, much of today’s media reporting seems to be more than mere cheerleading: genuine journalism has been sacrificed in favor of copywriting for vested interests paraded as news. 

VI. The Unannounced "Historic Moments" 

But the so-called "Historic Moment" has manifested in many unpopular and unannounced forms.

Let us enumerate the most critical ones: 

First, systemic leverage, consisting of PUBLIC DEBT plus TOTAL bank lending, has reached Php 28.515 trillion as of July 2024, accounting for 113% of the estimated 2024 NGDP!  Public debt servicing has also reached unparalleled levels!

Second, Q2 public spending, the financial industry’s net claims on the central government (NCoCG), and the banking system’s held-to-maturity (HTM) assets have also reached all-time highs.

Third, the banking sector’s business model transformation—from production loans to consumer loans—has been unprecedented.

Fourth, the savings-investment gap has reached a significant milestone.

Fifth, PSE borrowings, led by San Miguel’s Php 1.484 trillion, have also reached historic highs.

Sixth, the money supply (M1, M2, and M3) relative to GDP remains close to its record highs in Q1 2021.

Figure 6

Seventh, the BSP’s asset base remains near the record high attained during the pandemic bailout period (as of June 2024.) (Figure 6 topmost chart)

While there are more factors to consider, have you heard any media or establishment mentions or analyses of these issues?

Don’t these factors have an impact on the "fundamentals" of the PSE or the economy?

Or are we expected to operate under a state of "blissful oblivion," or the blind belief that "this time is different?" (The four most-deadliest words in investing—John Templeton)

It not only fundamentals, the current phase of the market cycle also tells a different story than the consensus whose primary focus is on a "return to normal" phase. (Figure 6 middle and lowest graphs)

Good luck to those who believe that the PSEi 30’s 7,000 level signifies a bull market or a historic moment.

____

References

The OFCs sub-sector includes the private and public insurance companies, other financial institutions that are either affiliates or subsidiaries of the banks that are supervised by the BSP (i.e., investment houses, financing companies, credit card companies, securities dealer/broker and trust institutions), pawnshops, government financial institutions and the rest of private other financial institutions (not regulated by the BSP) that are supervised by the Securities and Exchange Commission (SEC).

Jean Christine A. Armas, Other Financial Corporations Survey (OFCS): Framework, Policy Implications and Preliminary Groundwork, BSP Economic Newsletter, July-August 2014, bsp.gov.ph

 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

 At the outset, the masses misinterpreted it as nothing more than a scandalous rise in prices. Only later, under the name of inflation, the process was correctly comprehended as the downfall of money—Konrad Heiden in 1944

In this issue

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth

V. Examining the Discrepancies in Employment Data and Consumer Demand

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing

VIII. Surging Consumer NPLs as Driver of Falling Inflation

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility 

The recent decline in the Philippine CPI, which fell to 3.3% in August, is a symptom of strained consumers. Overleveraging has led to an acceleration in consumer loan NPLs in Q2. 

GMANews, September 5, 2024: The Philippines’ inflation rate eased in August, after an acceleration seen in the prior month, due to slower increases in food and transportation cost during the period, the Philippines Statistics Authority (PSA) reported on Thursday. At a press conference, National Statistician and PSA chief Claire Dennis Mapa said that inflation —which measures the rate of increase in the prices of goods and services— decelerated to 3.3% last month, slower than the 4.4% rate in July. This brought the year-to-date inflation print in the first eight months of 2024 to 3.6%, a slowdown from the 5.3% rate in the same period last year and still within the government’s ceiling of 2% to 4%. 

Quotes from previous posts… 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024)

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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. 

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. (Prudent Investor, September 2024) 

Let us examine the data in relation to other relevant metrics.

First, the August Consumer Price Index (CPI) fundamentally confirmed the signals provided by the Philippine yield curve regarding the resumption of its downtrend. We will explore this in more detail later.

Figure 1

Second, a slowing CPI does not imply that prices are falling, as some officials have suggested. Rather, it indicates a deceleration in the rate of price increases for the average goods and services in the government’s CPI basket. That is to say, authorities continue to use the inflation channel as an indirect means of taxation. Even from the standpoint of the CPI, the Philippine peso has lost over 99% of its purchasing power since 1957. (Figure 1, topmost chart)

Third, the headline CPI has become increasingly volatile, as evidenced by its significant fluctuations: it surged from 3.7% in June to 4.4% in July, then decreased to 3.3% in August. The rate of change in the Month-on-Month (MoM) data illustrates this volatility. (Figure 1, middle image) 

Notably, with the largest weighting in the CPI basket, food is usually the culprit for this volatility. 

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality 

Fourth, the upside spike in housing, water, gas, and other utilities inflated the headline CPI. Rent and utilities were the only categories that experienced an increase in August on a month-on-month (MoM) basis. (Figure 1, lowest graph) 

Without the impact of rent and utilities, the headline CPI would have been drastically lower. This category has a significant weighting in the CPI basket, with a 21.4% share.

Figure 2

Fifth, the decline in the rate of price increases, as indicated by the headline CPI of 3.3% in August, had minimal impact on the bottom 30% of households, who experienced a CPI of 4.7% (down from 5.8% in July). However, the disparity between these categories remains at 2018 levels. (Figure 2, topmost diagram) 

Even with its flawed measurement, the government’s CPI highlights the broadening inequality. 

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans 

Sixth, the volatility of the headline CPI hasn’t been corroborated by the non-food, non-energy Core CPI, which continues to decline. 

Although the gap between the headline CPI and the Core CPI has narrowed, it remains substantial due to the relatively faster decline in the Core CPI. (Figure 2, middle graph) 

Seventh, the law of supply and demand dictates that if the supply of goods or services exceeds demand, prices will fall. Conversely, if demand outstrips supply, prices will rise. 

In the current context, the weakening of the Core CPI is a symptom of the sustained erosion of domestic demand. 

This is exemplified by the consistently diminishing rate of price increases in retail components such as furnishing household equipment and maintenance, clothing and footwear, and personal care and miscellaneous goods. (Figure 2, lowest chart)

Figure 3

Eighth, the growth of total universal-commercial bank loans remains on a remarkable streak, posting a 10.4% growth rate last July—its third consecutive month of 10% growth. (Figure 3, topmost window) 

Moreover, universal commercial bank household credit grew at an even faster pace of 24.3%, marking its twenty-third consecutive month of over 20% growth! (Figure 3, middle diagram) 

Given this explosive growth in consumer and overall bank credit, which should have theoretically stimulated demand, why hasn’t it boosted the CPI?

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth 

Ninth, what has happened to the "Marcos-nomics stimulus" and the ramping up of Q2 record debt-financed public spending? Why have these measures not bolstered demand and the CPI? (Figure 3, lowest chart)

Figure 4

Tenth, the supply side has hardly been a factor in the CPI slowdown.

The slackening of imports, which were down 7.5% (in USD million) in June, was not an anomaly but a trend since peaking in August 2022.  (Figure 4, topmost pane) 

Domestic manufacturing has also not shown excessive growth. Manufacturing posted a 4.7% value growth and 5.25% volume growth last July, marking the third highest monthly growth since August 2023 (a year ago). (Figure 4, lower left chart) 

The headline S&P Global Philippines Manufacturing PMI reported an unchanged index of 51.2 in August, unchanged from July. (Figure 4, lower right chart) 

The PMI index has been consolidating with a downside bias, as demonstrated by the "rounding top." 

If the supply side had managed to grow at a minor to moderate rate in recent months, then demand represents the weak link behind the sliding CPI rate.  

The lack of significant supply-side expansion suggests that the primary driver of the CPI slowdown is the erosion of domestic demand. 

V. Examining the Discrepancies in Employment Data and Consumer Demand 

Why so?

The employment data is unlikely to provide a satisfactory explanation. 

Aside from the questionable nature of the statistics, the government attributed the swelling of July's employment rate to fresh graduates entering the workforce.

 

GMANews, September 6: The number of unemployed Filipinos increased in July as millions of young individuals, who graduated from college or senior high school and entered the labor force, did not land jobs during the period, the Philippines Statistics Authority (PSA) reported on Friday.

The decrease in the labor force participation rate from 66% in June to 63.5% in July likely underestimated the true number of unemployed individuals.

Figure 5

It's worth noting that a "rounding top" appears to be a persistent trend in the labor participation rate. (Figure 5, topmost diagram)

If this pattern continues, then for whatever reasons, it's likely that the labor force will shrink, which would negatively impact the employment population.

While most sectors reported decreases in employment (MoM) last July, the government (public administration and defense), finance, and IT sectors reported significant gains. The increase in government jobs is not surprising, given that they are one of the largest employers, particularly with the record high public spending in Q2. (Figure 5, middle image)

In any case, despite the second-highest employment rate in June, the rise in unemployment in July suggests that the substantial growth in bank credit has not been sufficient to create enough investments to absorb new graduates. 

The irony is that even if this data were close to accurate, the high employment rate demand story has been incongruous or inconsistent with the slowing consumer, the record high consumer bank credit levels, and the CPI. 

Another paradox is that the volatility in the labor data may be influenced by social mobility. In reality, the Philippine labor market has been beset by the byzantine nature of onerous labor regulations. 

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks 

Beyond that, the slope of the Philippine Treasury markets provides insights into economic conditions, inflation, and potential risks. 

Not only has it accurately predicted CPI dynamics, but it has also indicated the likelihood of increased economy-related risks. 

Consider this: Why has the CPI been on a temporary downtrend despite record levels of Universal Commercial bank consumer lending? This observation applies even to production loans, but our focus here is on consumer loans. 

The banking system’s total consumer loans, including real estate loans, surged to an all-time high of PHP 2.81 trillion in Q2 2024. This represents a record 21.75% of total bank lending, meaning that one-fifth of all Universal Commercial bank lending has been directed towards consumers.  (Figure 5, lowest graph) 

Four-fifths of these, which also demonstrates a declining share, represent lending to the supply side sector, primarily benefiting the elites.

Figure 6

This data represents evidence that Philippine banks have undergone a seismic transformation: a preference for consumers over producers. 

From a sectoral perspective, banks have also shifted their lending preferences toward high-risk, short-term lending—specifically credit cards and salary loans. 

Since 2017, the percentage share of credit cards relative to the total has surged to a milestone high, while the share of salary loans has also increased since 2021. Notably, the rapid growth of these segments has come at the expense of real estate and motor vehicle loans. (Figure 6, topmost image) 

Strikingly, the share of consumer real estate loans peaked at 45% in Q4 2021 and then nose-dived to 37% by Q2 2024. 

In a nutshell, banks have "backed up their trucks" to rapidly leverage Philippine consumers. 

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing 

The all-time high in consumer lending did not emerge in a vacuum. 

Primarily, consumers have turned to credit cards and salary loans to compensate for the loss of purchasing power due to inflation. 

Secondly, this trend has deepened consumers' reliance on credit cards and salary loans. 

Thirdly, the extended leveraging of consumers' balance sheets necessitates further credit to refinance or roll over existing debt. Some individuals use multiple credit cards, while others may tap into salary loans or borrow from the supply side for the refinancing of existing debt. 

It is important to note that the consumer credit data reveals an escalation in concentration risks. 

The surge in consumer lending indicates that only a small segment of the population has access to formal credit systems. 

The BSP’s Q2 2023 Financial Inclusion data reveals that consumer credit, including credit cards, salary loans, and other forms of bank credit, is limited to a minority segment of the Philippine population. (Figure 6, middle table)

Not only in finances, this group—primarily from the high-income sector—has been capturing a significant portion of the nation’s resources funded by credit. They are the primary beneficiaries of the BSP’s inflation policies. 

However, they also represent the most fragile source of a potential crisis. 

Conversely, the low level of participation in formal banking does not equate to a low level of leverage for the unbanked population. Instead, this larger segment relies on informal sources for credit. 

However, they also represent the most fragile source of a potential crisis.

Lastly, having reached their borrowing limits, some consumers have begun to default. 

VIII. Surging Consumer NPLs as Driver of Falling Inflation

Have the media or mainstream experts addressed this issue? 

Not when financial services are being marketed or deposits solicited; discussing conflicts of interest remains a taboo.

Despite subsidies and relief measures, the Non-Performing Loans (NPL) in consumer lending have been rising, driven primarily by credit cards and salary loans. (Figure 6, lowest chart)

Figure 7

Again, the all-time high in credit card and salary loans has led to a surge in NPLs. According to the BSP’s various measures, the NPLs for credit cards and salary loans relative to total NPLs in the Total Loan Portfolio (TLP) have been intensifying since 2021 (for salary loans) and 2023 (for credit card loans). (Figure 7, topmost, second to the highest and lowest-left and right graphs)

Despite the massive BSP support, the fastest-growing segments for banks are also the primary sources of their weaknesses. 

Published banking and financial data may be understated due to these relief measures and other factors. 

Why are banks significantly borrowing (focusing on short-term loans), competing with San Miguel, both listed and unlisted non-financials, financials, and the government? 

So, there you have it. The slowing inflation in the face of rampant credit growth is a symptom of the mounting balance sheet problems faced by consumers. 

Borrowings are not only used for spending but are increasingly being utilized to recycle loans—the Minsky Ponzi syndrome process is in motion. 

Extending balance sheet leveraging has not only weighed on consumer spending but has also caused a rise in credit delinquency. 

It also exposes the façade of a 6.3% Q2 GDP. 

The lesson is: current conditions reveal not only the fragile state of consumers but, more importantly, exposes the vulnerability of Philippine banks. 

The treasury markets have been signaling these concerns. 

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

But it doesn’t end here. 

Do you think the government would allow GDP to sink, which would deprive them of financing for their boondoggles? 

Naturally, no. So, authorities have embarked on a tacit "Marcos-nomics stimulus" to prevent cross-cascading defaults, initially marked by a resurgence of illiquidity. 

With the upcoming elections, public spending has surged, leading to increased monetary growth, as indicated by the most liquid measure, M1 money supply. 

Yes, this exposes the artificiality of a so-called "restrictive" or "tightening" regime.

Needless to say, this process will only foster more economic imbalances, which will manifest through the enlarged “twin deficits.”

Economic maladjustments will become evident in the growing mismatch between demand and supply, as well as between savings and investment (record savings-investment gap), leading to increased fragility in the banking system’s balance sheet. 

This, in turn, will prompt more easing policies from the BSP and accelerated interventions and liquidity injections from the tandem of financial institutions (led by banks) and the BSP. 

We should expect the BSP to expand and extend its relief measures to the banking system in an effort to buy time.

Or, the BSP’s strategy to address an escalating debt problem is to facilitate accelerated debt absorption. Amazing! 

As such, we should expect a third wave of inflation, in the fullness of time, which will exacerbate the leveraging of the economic system and worsen the current predicament. 

The political path dependency is driven primarily by perceived "free lunches" (or throwing money into the system). 

The promised bull market will not be in Philippine assets but in debt, leveraging, and its attendant risks. 

So, despite the Philippine peso floating along with its regional peers, benefiting from the perceived "Powell Pivot," the USD/PHP exchange rate should eventually reflect the developing economic and financial strains. 

Until a critical disorder surfaces, a reversal in this political direction is unlikely.

Eventually, the treasury curve will indicate when this reversal might occur. 

The point is that even when distorted by interventions, markets are reliable indicators of future events. 

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References 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024