US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar

  

interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size printing a constantly devalued currency—Daniel Lacalle

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar 

Last week, the USD-Philippine peso retested its all-time high of 59, or the BSP's "Maginot Line," which they misleadingly attribute to the "strong USD." The historic savings-investment gaps translate into a case for a weaker peso. 

I. The USDPHP Retest the 59 ALL Time High Level; The "Strong Dollar" Strawman 

The US dollar-Philippine peso exchange rate $USDPHP hit the 59-level last Thursday, November 21st—a two-year high and the upper band of the BSP’s so-called "Maginot Line" for its quasi-soft peg. The Bangko Sentral ng Pilipinas (BSP) attributed this development to the strength of the US dollar, explaining: "The recent depreciation of the peso against the dollar reflects a strong US dollar narrative driven by rising geopolitical tensions…The peso has traded in line with the regional currencies we benchmark against."

Figure 1 

To validate this claim, we first examine the weekly performance of Asia's currencies. While the US Dollar Index $DXY surged by 0.8% this week, most of the gains were driven by the euro's weakness.  (Figure 1, upper window) 

Among Bloomberg’s quote of Asian currencies, 8 out of 10 saw declines; however, the Thai baht bucked the trend and rallied strongly, while the Malaysian ringgit also closed the week slightly higher. (Figure 1, lower graph) 

The US Dollar averaged a 0.4% increase against Asian currencies this week. 

However, the strength of the Thai baht and Malaysian ringgit contradicts or disproves the idea that all regional currencies have weakened against the USD.

Figure 2 

A second test of the claim that a "strong dollar is weighing on everyone else, therefore not a weak peso" is to exclude the US dollar and instead compare the Philippine peso against the currencies of our regional peers: the Thai baht $THBPHP, Malaysian ringgit $MYRPHP, Indonesian rupiah $IDRPHP, and Vietnamese dong $VNDPHP. (Figure 2) 

From a one-year perspective, the Philippine peso has weakened against all four of these currencies, providing clear evidence that its decline was not limited to the US dollar but extended to its ASEAN neighbors as well. 

Ironically, the same ASEAN majors have recently joined the BRICS. Have you seen any reports from the local media on this? 

The $USDPHP ascent to 59 has been accompanied by a notable decline in traded volume and volatility, suggesting that the BSP has been "pulling out all stops" to prevent further escalation. 

This includes propagating to the public the "strong US dollar" strawman. 

II. BSP’s Interventions and the Case for a Weaker Peso: Record Savings-Investment Gap 

Figure 3

Since the BSP is among the most aggressive central banks engaged in foreign exchange intervention (FXI), it can surely buy some time before the USDPHP breaks through this upper band and tests the 60-level. (Figure 3) 

We have long been bullish on the $USDPHP for the simple reason that the historic credit-financed savings-investment gap (SIG), manifested primarily through its "twin deficits" (spending more than producing), translates to diminished local savings. 

This, in turn, means more borrowing from the savings of other nations to fund excessive domestic consumption. 

Accordingly, the SIG is inherently inflationary, which results in the debasement of the purchasing power of the peso—an indirect consumption of the public's savings. 

In any case, the USD Philippine Peso exchange rate ($USDPHP) should be one of its best barometers and hedge against inflation (Prudent Investor, April 2024) 

In other words, since there is no free lunch, someone will have to pay for the nation’s extravagance.

Figure 4

The Philippine external debt's streak of record highs coincides with the pandemic-era deficit spending levels. Apparently, this stimulus suffers from diminishing returns as well. 

This is apart from the BSP’s financial repression policies or the inflation tax, which redistributes the public’s savings to the government and the elites. 

Such capital-consuming "trickle-down" policies combine to strengthen the case for a weak peso. 

Yet, the continued rise in external debt indicates that the Philippines has insufficient organic US dollar resources (revenues and holdings), despite the BSP’s claims through its Gross International Reserves (GIR). 

To keep this shorter, we will skip dealing with the BSP’s GIR and balance sheet. 

Nonetheless, rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Snider, 2018) 

As a result, the country becomes more vulnerable to a dollar squeeze. 

Hence, the BSP hopes that, aside from cheap credit, loose monetary conditions will prevail, allowing them to easily access cheap external funding. 

However, by geopolitically aligning with the West against the Sino-Russian-led BRICS, the Philippines increases the risks of reduced access to the world’s savings. 

As an aside, the Philippines attempts to mimic the United States. However, because the US has the deepest capital markets and functions as the world’s de facto currency reserve, it has funded its "twin deficits" by absorbing the world’s "surpluses"—the "exorbitant privilege." 

Unfortunately, not even the US dollar standard, operating under present conditions, will last forever, as it fosters both geopolitical and trade tensions. 

III. USDPHP: Quant Models and the Lindy Effect

Figure 5

We are not fans of analytics based on exchange rate quantitative models such as the Deviation from Behavioral Equilibrium Exchange Rate (DBEER), the Fundamental Equilibrium Exchange Rate (FEER), and Purchasing Power Parity (PPP), but a chart from Deutsche Bank indicates that the Philippine peso is among the most expensive world currencies. 

Needless to say, all we need is to understand the repercussions of free-lunch policies. 

People have barely learned from past lessons. The USDPHP remains on a 54-year long-term uptrend, even after enduring episodic bouts of financial crises—such as the 1983-84 Philippine debt restructuring and the 1997-98 Asian crisis. 

The sins of the past have been resurrected under the alleged auspices of "this time is different; we are doing better." 

Following the Asian Crisis, a relatively cleansed balance sheet allowed the peso to stage a multi-year rally from 2005 to 2013. 

Unfortunately, we have since relapsed into the old ways. 

Because the elites benefit from the trickle-down policies, there is little incentive for radical reform. 

The "strong US dollar" only exposes the internal fragilities of a currency. 

Therefore, trends in motion tend to stay in motion until a crisis occurs. 

The USD-PHP seems to exemplify the Lindy effect: the longer a phenomenon has survived, the longer its remaining life expectancy. 

___

References

Prudent Investor, Navigating the Risks of the Record Philippines’ Savings-Investment Gap, February Public Debt Hits All-Time High and March CPI Reinforces the Deficit-CPI Cycle Tango April 8, 2024

Jeffrey P Snider, The Aid of TIC In Sorting Shorts and Shortages, October 17, 2018

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

 

Inflation was created by the wrong monetary policy, and incorrect central bank measures may have lasting negative impacts on the economy. The first effect is evident: governments continue to crowd out the real economy, and families and businesses suffer the entire burden of rate hikes. Maybe the objective was always to increase the size of the public sector at any cost and implement a gradual nationalization of the economy—Daniel Lacalle 

In this issue

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

I. Clarifying Our Analytics of the PSEi 30 Data

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

V. Analysis by PSEi 30 Member Firms (9-Month)

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression 

The PSEi 30’s lackluster fundamental performance validated the mainstream’s unexpected decline in Q3 GDP, highlighting the persistent effects of crowding out and financial repression. 

I. Clarifying Our Analytics of the PSEi 30 Data 

Two factors must be explained before delving into the 9-month and third-quarter analysis of the performance of PSEi 30 constituent firms. 

First, the definition of data is crucial.  

-Data from the same reporting coverage provides a more accurate comparison, as it reflects the PSEi members during the relevant period. This is referred to here as 1A data.

-Data from a different reporting coverage/period results in an apples-to-oranges comparison due to two factors: periodic updates to PSEi constituents and the exclusion of past data revisions. This is referred to as 1B data.

-Aggregates may be overstated, as they include not only holding companies but also their subsidiaries.

Q3 PSEi 30’s Financial Activities: Defining the Operating Conditions

Next, it is essential to define the operating conditions of the third quarter.

Figure 1

The Philippine Q3 2024 GDP unexpectedly slipped to 5.2%, its lowest level since Q2 2023’s 4.3%, despite systemic leverage hitting an all-time high.  (Figure 1, upper graph)

Public debt and bank credit expansion grew by 11.4%, marking its fastest pace since Q4 2022.

The Bangko Sentral ng Pilipinas (BSP) initiated its "easing cycle" with a 25-basis point rate cut in August, which helped fuel this growth.

Despite reaching the near all-time high employment rate, both headline and core inflation rates fell to 3.2% and 2.6%, respectively, the lowest since Q1 2022. (Figure 1, lower graph)

Figure 2

Marcos-nomics stimulus, channeled through its fiscal aspect, remained vibrant, with public spending growing by 6.4% in Q3, reaching its third-highest level. (Figure 2, upper image)

Once again, despite record leverage, money supply growth, measured by M3, stumbled to its lowest level since Q3 2022.

It was an active period for fiscal and liquidity operations by the banking system and the BSP. As a ratio to GDP, banks' net claims on the central government (NCoCG) reached the third-highest level on record, while the BSP's counterpart dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure 2, lower diagram)

In contrast to the establishment’s "restrictive" narrative, Q3 indicated loose financial conditions, which were further bolstered by the BSP’s rate cut and sustained increases in systemic leverage, supported by BSP and bank liquidity, as well as fiscal operations.

The notion that the BSP’s easing would provide support to the economy not only failed to materialize; consumption fell, as evidenced by the declining trend in the Consumer Price Index (CPI) and the money supply—ironically occurring despite strong liquidity injections.

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

These macroeconomic conditions were reflected in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):

Figure 3

One. The aggregate non-financial debt increased by Php 208 billion, marking the lowest increase since 2020. This figure excludes borrowings of the three largest banks (Figure 3, topmost table) 

Two. The cumulative net income growth of Php 47.17 billion was also the smallest since 2021. 

Three. Revenue expansion, totaling Php 395 billion, was the second lowest since 2021. 

Four. The PSEi 30’s cash reserves shrank by Php 5.27 billion for the second consecutive year, but at a more minimal scale compared to last year. 

These figures indicate that all segments exhibited a slowdown, with net income experiencing the most pronounced decline. 

There’s more. 

Because the non-financial debt-to-net income ratio in 2024 represented the second highest level since 2022, it indicates that corporations borrowed more to generate income (Php 4.4 debt for every peso of net income). (Figure 3, middle graph)

Additionally, they borrowed to address their liquidity shortfall.

However, this data understates the full picture, as it excludes the borrowings of the three largest banks. These banks reported an increase of Php 491 billion in bills payments alone!

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

Nota Bene: While we rely on the accuracy of these reports, it is worth noting the potential for discrepancies. Past instances, such as PLDT’s 4-year "budget overrun," demonstrate that reporting errors often go overlooked or ignored by both the PSE and government agencies.

Such regulatory lapses could create conditions that encourage misreporting, exemplifying the moral hazard syndrome.

We suspect that some companies may be understating the extent of their leverage by reclassifying it under other liability categories

Debt: In nominal terms, non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php 5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes bank debt. (Figure 3, lowest window)

Net Income: Published net income expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93 billion. However, this represented the lowest growth rate since 2021.

Revenues: Despite historic increases in systemic leverage, near full employment and the third-largest public spending on record, revenue grew by an unimpressive 9.4%, reaching a record Php 5.265 trillion.

This also translates to a PSEi 30 revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating that these elite firms contribute more than a quarter of the estimated Nominal GDP. If we include all 284 listed firms, this figure would likely account for approximately two-fifths of NGDP.

This manifests the trickle-down structure of the Philippine political economy, where the prevailing approach prioritizes consolidating wealth and power among politically connected entities through centralization, rather than fostering genuine "inclusiveness" via grassroots entrepreneurship (such as SMEs) or a bottom-up framework.

Lastly, the government reported a headline GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by only 6.8% suggesting a significant overstatement of the statistical economy. 

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

Figure 4

Although the holding firms sector posted the smallest percentage growth, it experienced the largest increase in debt, amounting to Php 104.21 billion, followed by the real estate sector with Php 38.62 billion. (Figure 4, upper table)

The financials and holding firm sectors recorded the highest net income growth, with increases of Php 20.327 billion and Php 13.35 billion, respectively, accounting for 43% and 28.3% of the total.

The sector with the highest revenue growth was the holding firm sector, which generated Php 196.653 billion, followed by financials with Php 86.44 billion, representing 49.8% and 22% of the total, respectively.

Meanwhile, the services sector led in cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial sector experienced the largest cash outflows.

In Q3, holding firms and financials reported the highest net incomes of Php 16.84 billion and Php 7.8 billion, respectively. (Figure 4, lower table)

These two sectors also delivered the strongest revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.

In summary, during the nine-month period and in Q3, the financials and holding sectors dominated net income and revenue growth, while other sectors struggled to keep pace.

V. Analysis by PSEi 30 Member Firms (9-Month)

Figure 5

Broken down into individual categorical activities:

The top firms contributing to non-financial debt increases were San Miguel Corporation (SMC) and Ayala Corporation with increases of Php 63.9 billion and Php 57.6 billion, respectively.

Out of the 27 firms analyzed, 15 posted debt expansion during the period, with SMC accounting for 30% of the total debt growth in pesos.

In the net income growth segment of the PSEi 30, International Container Terminal Services, Inc. (ICT) and the Bank of the Philippine Islands (BPI) were the top performers with Php 9.85 billion and Php 9.441 billion, correspondingly.

On the other hand, DMCI Holdings (DMC) posted the largest decline among the eight firms that reported a decrease in net income growth.

SMC and BPI also led the revenue growth segment. Conversely, DMC reported the largest revenue decrease among the seven firms that experienced revenue declines during the period. Notably, SMC accounted for 30% of total revenue growth in peso terms.

Finally, ICT emerged as the leader in cash reserves growth, while Aboitiz Equity Ventures (AEV) headed the minority of ten issues that saw reductions in cash flows.

Once again, even among the elite firms, only a select few tend to dominate in terms of performance.

Notably, financial giants such as BPI and BDO emerged as some of the most prominent gainers, while non-consumer sectors, including ICT and SMC, led in the net income and revenue segments, respectively.

Interestingly, the underwhelming performance of consumer-focused firms like SM Investments and Ayala Corporation—arguably the most exposed to the local consumer market—highlights the underlying fragility of the sector

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

The Bottom Line: Despite the "Marcos-nomics stimulus," near-record employment levels, and loose financial conditions, the conspicuous signs of weakness among the PSEi 30 member firms not only align with the GDP slowdown observed in Q3 but may also indicate much slower overall growth.

Moreover, this underbelly has exposed the firms’ increasing vulnerability to extensive leveraging.

What is particularly notable is that many of these PSEi 30 firms are linked to political projects that should have enhanced their performance.

Instead, their underwhelming performance could be indicative of the detrimental effects of the crowding-out syndrome—a phenomenon that gradually erodes economic productivity over time—compounded by financial repression and other forms of government interventions (such as the subtle shift to a war economy, increasing centralization and more).

 

PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

 

History will not be kind to central bankers fixated on financial economy and who created serial speculative booms to sustain the illusion of prosperity. It will also be critical of governments unwilling to address weaknesses, who deflected shifting hard policymaking to independent, unelected and largely unaccountable central banks—Satyajit Das 

In this issue 

PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

I. PSEi 30 Craters on Signs of Re-Tightening Amid Rising Dollar and Higher UST Yields

II. Despite the Market Carnage: Financials Share of the PSEi 30 Zoom to All-time High!

III. Financialization: The Expanding Role of Banks in Achieving Political Goals

IV. "National Team?" In Q2, Other Financials Corporations Sold, the PSEi 30 Plunged

V. In Q3, Mismatch Between Financial Index-Bank Fundamentals Reached a Blow-off Phase!

VI. Worsening Bank Liquidity Conditions as Cash-to-Deposits Hit Milestone Low

VII. Liquidity and Collateral Crunch? Bank Borrowings, Focused on Bills, Zoomed to Record Highs in September, as Repos also Hit All-time Highs!

VIII. Despite Lower Rates Held to Maturity Assets Near All-time Highs, Record Bank QE

IX. A Snapshot of Q3 and 9-Month Performance of PSE Listed Banks

X. Highlights, Summary and Conclusion

PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

Even as the PSEi plummeted due to signs of global and local re-tightening, the Financials outperformed, widening the mismatch between share prices and fundamentals. Will a reckoning come soon?

I. PSEi 30 Craters on Signs of Re-Tightening Amid Rising Dollar and Higher UST Yields"

Figure 1

The Sage of Omaha, Warren Buffett, once said, "Only when the tide goes out do you discover who's been swimming naked."

Have the signs of tightening upended the dream of easy money’s "goldilocks" economy, or have they exposed those who have been "swimming naked?"

The surging US dollar index, coupled with rising 10-year Treasury yields—both largely attributed to Trump's policies— has sent global risk assets tumbling. Yet, these developments took shape two months before the US elections. (Figure 1, topmost graph)

This includes the Philippine PSEi 30, which plunged by 4.31%, marking its largest weekly decline in 2024 and the steepest drop since the week of September 30, 2022, when it fell by 8.3%.

As of Thursday, November 14, the headline index broke below the 6,600 level, closing at 6,557.09.

A notable oversold rebound in industrials, led by Meralco (up by 7.78%) and Monde (up by 7.52%), along with financials from BPI (up by 3.7%) and CBC (up by 4.58%), contributed to a low-volume rally of 1.82% on Friday.

Year-to-date, the PSEi 30 is struggling to maintain its narrowing return of 3.5%.

II. Despite the Market Carnage: Financials Share of the PSEi 30 Zoom to All-time High!

The Financial Index, down by only 1.86%, was the least affected in this week’s market carnage. BPI was the only member of the PSEi 30 component to withstand the foreign-driven selloff, while Jollibee ended the week unchanged. (Figure 1, middle pane)

Interestingly, this outperformance has propelled the aggregate free-float market capitalization weighting of the three major banks of the headline index to an all-time high. (Figure 1, lowest chart)

Figure 2

Furthermore, financials accounted for 41.7% of the mainboard's volume on Friday—the third-highest share since October. (Figure 2, topmost diagram)

Meanwhile, October’s cumulative 29.92% accounts for the sector’s highest share since July 2023, which also translates to a 2017 high.

In a related note, the Bangko Sentral ng Pilipinas (BSP) has suspended its free publication of non-BSP-generated data, including PSE data on monthly price-earnings ratios (PER), market capitalization by sector, index data, and volume distribution by sector. This suspension hampers our ability to track critical developments in market internals. (Yes, I wrote them)

The point being, the increasing share of mainboard volume by the financial sector has pillared the rising share of the sector’s market cap share of the PSEi 30.

However, this dynamic also implies growing concentration risk in the stock market.

III. Financialization: The Expanding Role of Banks in Achieving Political Goals

Businessworld, November 13: THE PHILIPPINE banking system’s net profit jumped by 6.4% at end-September as both net interest and non-interest income grew, data from the Bangko Sentral ng Pilipinas (BSP) showed. The combined net income of the banking industry rose to P290 billion in the first nine months of 2024 from P272.6 billion in the same period a year ago.

The PHP 290 billion profit and a 6.4% growth rate represent the Q3 figures year-over-year (YoY).

Continuing from last week’s discussion, the diverging dynamics in the Philippine Stock Exchange (PSE) have also been reflected in the GDP figures. 

Although the financial sector has been on an upward trajectory since the new millennium, its share of the real GDP has rapidly deepened during the BSP’s historic rescue of the sector. 

This was notably influenced by the BSP historic intervention to rescue the sector, which included an unprecedented PHP 2.3 trillion quantitative easing package, historic cuts in official and reserve ratios, as well as unparalleled subsidies and relief measures. 

In line with the rising share of money supply-to-GDP, the financial sector's share of GDP reached its third highest level at 10.8% in Q3. (Figure 2, middle image) 

It even hit an all-time high of 10.9% when considering the 9-month real GDP data. 

While this evolution may be labeled as "financialization," the essential message is clear: BSP policies have led to an economy increasingly immersed (or heavily reliant) in credit and liquidity, primarily channeled through an elite-owned and controlled banking system. 

This deepening dependence comes at the expense of the development of other competing financial conduits, such as capital markets. 

The underlying reason for this is political: the bank-led financial sector serves as the primary non-BSP financier of the government’s deficit spending. 

As a result, the government's calls for improvements in the capital markets appear to be mere lip service. 

However, judging by their "demonstrated preference" in policy choices, it appears that inflating bank shares may serve to camouflage the adverse consequences of this deepening and complex political-economic arrangement. 

IV. "National Team?" In Q2, Other Financials Corporations Sold, the PSEi 30 Plunged

The developments in Other Financial Corporations (OFCs) provide valuable insights. 

In Q2, OFCs eased their holdings of equities.  According to the BSP, "The other financial corporations’ claims on the other sectors dropped as their holdings of equity shares issued by other nonfinancial corporations fell." 

The Non-bank financial institutions and OFCs "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)" (Armas, 2014) 

In the same quarter, OFC claims on the private sector decreased by 0.5% quarter-over-quarter (QoQ), while the PSEi 30 index plunged by 7.1%. (Figure 2, lowest visual) 

My guess is that some of these OFCs are part of what could be considered the Philippine version of the "national team." 

V. In Q3, Mismatch Between Financial Index-Bank Fundamentals Reached a Blow-off Phase!

Nevertheless, the deviation between the fundamentals of banks and their share prices has reached "blow-off" proportions!

Figure 3 

In Q3, the banking system reported a modest growth of 6.4%, slightly higher than Q2’s 4.1%. However, the financial index skyrocketed by 19.4% quarter-over-quarter (QoQ). 

From another angle, 9-month profit growth was up by 5.07%, even as the financial index surged by a stunning 23.4% year-on-year in Q3.

Worst of all, profit trends and the financial index have moved in opposite directions. 

Since profit growth peaked in Q3 2022 and subsequently eased, shares of the seven-member bank stocks (excluding the eighth member: PSE) within the financial index have continued to accelerate. (Figure 3, topmost window) 

Meanwhile, given that universal and commercial banks account for 93.9% of total bank assets, their profit growth largely mirrors the entire banking system. In Q3, profit growth was 7.03%, and on a 9-month basis, it stood at 6%. 

These figures underscore the increasing monopolization of the financial industry by banks validated by the BSP’s Total Financial Resources (TFR) data. 

Total financial resources grew by 10.07% to a record PHP 33.08 trillion. 

The banking sector’s share surged to an all-time high of 83.3%, driven mainly by universal and commercial banks, whose contribution reached a record 78.1%. (Figure 3, middle image) 

So let us get this straight: banks have increased their share of trading activities in the PSE, as well as their slice of both the PSEi 30 and the GDP pie. They now command 83.3% of total financial resources and are continuing to rise. 

This dominance doesn’t even account for their substantial role in the local bond markets, where they act as issuers, intermediaries, and holders. 

Even without the BSP acknowledging this, what we are witnessing is the intensifying risks within the Philippine financial-economic system. 

VI. Worsening Bank Liquidity Conditions as Cash-to-Deposits Hit Milestone Low

Have you ever seen any experts or establishment analysts address the developing contradiction between the banks' reported profits and their liquidity conditions? 

Cash and due from banks, or bank cash reserves, plummeted by 13.6% in September 2024, following a brief 4% rebound in August. This decline brought cash reserves to their lowest level since 2019. (Figure 3, lowest graph) 

To address the emerging liquidity shortfall, the BSP previously reduced the bank reserve requirement ratio (RRR) from 19% to 14%, implemented in seven installments from March 2018 to December 2019. 

Cash reserves saw a temporary spike in 2020 when the BSP injected Php 2.3 trillion into the system, accompanied by an RRR cut from 14% to 12% in April 2020. 

However, facing diminishing returns, cash reserves resumed their downward trend. 

Once again, doing the same thing and expecting different results, the BSP reduced the RRR by a larger margin than in 2020, lowering it from 12% to 9.5% in June 2023. 

Despite these efforts, the challenges within the banking system's cash reserve position have persisted.

Figure 4

Moreover, while the growth in peso deposit rates increased from 6.9% in August to 7.07% in September—the slowest growth rate since July 2023—the BSP’s cash-to-deposit ratio plummeted to 12.44%, its lowest ratio since at least 2013! (Figure 4, topmost and second to the highest graphs) 

Yet, with the record bank credit expansion, why the sluggish growth in deposits? Where did the money flow into? 

Even with the recent decline in inflation rates, have a minority of "banked" households continue to draw from their savings? 

Furthermore, the banks' liquid asset-to-deposit ratio, which includes both cash reserves and financial assets, fell to 50.34%, reverting to levels seen during the BSP's rescue efforts in July 2020. 

Incredible. 

And this is just one facet of the mounting liquidity challenges that banks seem to be facing. 

VII. Liquidity and Collateral Crunch? Bank Borrowings, Focused on Bills, Zoomed to Record Highs in September, as Repos also Hit All-time Highs! 

More eye-catching data emerged last September. 

Bank borrowings—primarily in short-term bills—skyrocketed to an all-time high! Borrowings surged by 49.7%, reaching a record PHP 1.7 trillion, with their share of total liabilities climbing to 7.3%, the highest since 2021. (Figure 4, second to the lowest and lowest charts) 

The liquidity shortfall is most pronounced over the short-term, this is why bank’s bills payable zoomed to unscaled heights.

Figure 5

Not only that, bank short-term repo (repurchase agreements) or RRP (reverse repurchase) operations with the BSP and other banks have also launched into the stratosphere!

With record repo operations, the RRP’s 3.72% share of the bank’s total assets surged to the highest level since at least 2015! (Figure 5, upper image) 

Could this rampant use of repurchase agreements (repos) be underlying growing collateral issues in the financial system? As banks increasingly depend on repos for short-term liquidity, are we witnessing a decline in the quality of collateral or a shortage of high-quality assets available for these transactions? 

These developments likely explain the BSP's abrupt announcement of the latest series of RRR cuts, which took effect last October. 

However, such actions resemble a Hail Mary pass, with RRR ratios now headed toward zero. 

VIII. Despite Lower Rates Held to Maturity Assets Near All-time Highs, Record Bank QE

Another paradox: banks reported that credit delinquencies—across the board—marginally declined in September. (Figure 5, lower diagram) 

If this is true, then higher profits combined with lower non-performing loans (NPLs) should result in more, not less liquidity 

Figure 6

Additionally, the easing of interest rates, as indicated by declining treasury yields, should have reduced banks' held-to-maturity (HTM) assets. As noted repeatedly, HTM assets drain liquidity because they lock up funds. (Figure 6, topmost graph)

Yet, there hasn’t been significant improvement in this area. 

Moreover, since authorities aim to meet year-end spending targets, boost GDP, and finance the upcoming elections, it is expected that the government will ramp up its deficit spending in Q4. 

This increase in public spending will likely lead to a rise in banks' and the financial sector’s net claims on central government (NCoCG), which may translate to higher HTM assets. (Figure 6, middle chart) 

Furthermore, if the current trend of declining inflation reverses, or we experience a third wave of rising inflation, banks might resort to accounting maneuvers to shield themselves from potential mark-to-market losses by shifting these assets into HTMs. 

That is to say, increases in debt-financed government spending and rising inflation rates could therefore result in higher levels of HTM assets.

Above all, banks are not standalone institutions; they have deep exposure to counterparties. As noted last week, 

Led by banks, the financial sector is the most interconnected with the local economy.  Its health is contingent or dependent upon the activities of its non-

financial counterparties. 

Alternatively, the sector’s outgrowth relies on political subsidies and is subject to diminishing returns. 

Yet ultimately, this should reflect on its core operational fundamentals of lending and investing. (Prudent Investor, October 2024) 

The transformational shift in the banking system’s business model—from production and consumption—could be ominous. Part of this shift has been motivated by pandemic-era subsidies and relief measures, as well as a move away from unproductive industry loans. 

As a result, the consumer share of total bank loans (excluding real estate) reached an all-time high of 14.9% in September 2024, while the share of production loans declined to 82.7%. The remaining 2.4% comes from non-resident loans. (Figure 6, lowest image) 

Banks have embraced the government’s belief that spending drives the economy, neglecting the balance sheet health of individuals, as well as the potential misallocations as a result of artificially low rates. 

But what happens to the consumer economy once their balance sheets have been tapped out? 

This should not surprise to our readers, given that the "inverted belly" of the Treasury yield curve has already been signaling these concerns.

IX. A Snapshot of Q3 and 9-Month Performance of PSE Listed Banks

Finally, here is a snapshot of the micro aspects of the financials.

Table 7

The performance of PSE-listed banks indicates that while all-bank profits grew by 14% to Php 226 billion in the first nine months of 2024, bills payable jumped by 79%, or Php 579 billion, reaching Php 1.31 trillion. This increase in bills payable signifies more than double the net profits generated over the same period. The data excludes the small-scale Citystate Savings Bank [PSE: CSB]. [Table 7]

PSEi banks accounted for 84% of the nine-month increase in bills, relative to their 73% share of net income growth. Metrobank [PSE: MBT] represented the most aggressive borrower, with a 61% share. 

We have yet to reconcile the stark divergence between the reported BSP bank performance and the aggregate activities of listed firms. 

Nonetheless, through aggressive lending, banks boosted their top and bottom lines in Q3, positively impacting the nine-month performance. 

Fueled by a 29.7% growth in non-PSEi banks, the net income growth of all banks soared by 22%. 

X. Highlights, Summary and Conclusion 

In the end, we can summarize the banking sector as having the following attributes: (as of September or Q3) 

1. all-time highs in:

-Financial Index

-market cap share of the PSEi 30 (3 biggest banks)

-turnover of financial sector to mainboard volume (near)

-nominal or Philippine peso and % share of total financial resources

-nominal net claims on central government

-nominal Held-to-Maturity assets

-total bank lending in Philippine pesos

-percentage share of consumer bank lending

-nominal bank borrowing (mainly Bills)

-nominal repo operations

- nominal net financial assets

2. Historical lows in:

-cash-to-deposits

-production pie of total bank lending

-reserve requirement ratio

3. Declining trend in:

-cash reserves

-profit growth

-deposit growth

-liquid asset-to-deposit ratio

How is it that the supposedly "profitable" financial institutions, supported by the recent slowdown in non-performing loans, have been accompanied by sustained declines in deposit and savings rates, as well as a massive hemorrhage in liquidity that compelled them to rapidly access short-term financing via bills and repos?

Have profits been overstated? Have NPLs been understated?

To what extent have the BSP’s relief measures and subsidies caused distortions in banks’ reporting of their health conditions?

Why the flagrant disconnect between stock prices and the actual conditions of the banks?

Could the "national team" have been tasked with camouflaging recent developments through a panicked pumping of the sector’s shares?

Does the ongoing shortfall in liquidity portend higher rates ahead?

Given all these factors, what could possibly go wrong?

As we recently pointed out,

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. (Prudent Investor, October 2024)

____

References 

Satyajit Das, Central banks: The legacy of monetary mandarins, New Indian Express, November 15, 2024 

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

Prudent Investor, Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory, November 10, 2024 

Prudent Investor, Important Insights from the Philippine PSEi 30’s Melt-Up! October 7, 2024

  

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

 

it is important to recognize that real GDP is an analytic concept. Despite the name, real GDP is not “real” in the sense that it can, even in principle, be observed or collected directly, in the same sense that current-dollar GDP cannot in principle be observed or collected as the sum of actual spending on final goods and services in the economy. Quantities of apples and oranges can in principle be collected, but they cannot be added to obtain the total quantity of ‘fruit’ output in the economy—Steven Landefeld and Robert P. Parker, Bureau of Economic Analysis, 1995

In this issue 

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

I. The PSEi 30 Deviated from GDP’s Trajectory

II. The Treasury Markets as a Harbinger of the Economic Slowdown

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

IV. GDP: A Tool for Political Narrative

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back?

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

Despite declining inflation rates and lower interest rates, Philippine consumers face tremendous obstacles, as shown by the 5.2% Q3 GDP growth. The PSEi 30 has mispriced the GDP's trajectory 

Reuters, November 7, 2024: The Philippine economy grew in the third quarter at its slowest annual pace in more than a year as severe weather disrupted government spending and dampened farm output, to strengthen the case for further policy easing. Gross Domestic Product (GDP) grew 5.2% in the July-September on the year, government data showed on Thursday, below a Reuters poll forecast of 5.7%, for the most tepid rise since expansion of 4.3% in the second quarter of 2023.

I. The PSEi 30 Deviated from GDP’s Trajectory 

Stock markets are often considered discounting mechanisms for future economic activity. But are they? 

The PSEi 30’s impressive 13.4% return in Q3 2024—the best since 2010—was largely based on expectations that low interest rates would stimulate economic activity. 

However, despite the BSP’s rate cut in August 2024 and the tacit Marcos-nomics stimulus, Q3 GDP fell to its lowest level since the 4.3% recorded in Q2 2023.

Figure 1

Viewed in the context of the 15% year-over-year returns at the end of last Q3, the PSEi 30 has moved in the opposite direction to the GDP. (Figure 1, topmost graph) 

Faced with this inconvenient reality, the PSEi plunged 2.32% this week, marking its third consecutive weekly decline and dipping below the 7,000 level—a 7.6% drop from the October 7th peak of 7,554.7. 

Interestingly, a local media outlet, still grappling with "Trump Derangement Syndrome," attributed this decline to Trump's electoral victory, suggesting that local stocks "price in the risks of a second Donald Trump presidency and an economic slowdown."  

If the "Trump trade" holds any truth, not only did US stocks soar to new records, but Asian equities also saw significant boosts this week. Among the region's 19 national benchmarks, 14 recorded positive returns with an average gain of 1.33%!

The exceptions were Indonesia, the Philippines, Vietnam, India, and Sri Lanka. How does this fit into the narrative of the "Trump trade"?

Moreover, it's not just the PSEi 30 that should raise our concerns. Given that the financial sector has been a market leader, the financial index also warrants close attention.

The financial index posted a remarkable 23.4% year-on-year return at the end of Q3 2024, despite a notable deceleration in the sector's GDP since its peak in Q4 2023. The sector recorded an 8.8% real GDP growth in Q3, up from 8% in Q2, but lower than the 12% and 10.3% growth in Q4 2023 and Q1 2024, respectively. Bank-led financials have been a critical source of gains, as evidenced by their increasing share of the sector's GDP, despite the 2022-2023 rate hikes. (Figure 1, middle and lowest images)

Led by banks, the financial sector is the most interconnected with the local economy.  Its health is contingent or dependent upon the activities of its non-financial counterparties.

Alternatively, the sector’s outgrowth relies on political subsidies and is subject to diminishing returns.

Yet ultimately, this should reflect on its core operational fundamentals of lending and investing.

This week, the financial index fell by 2.9%.  As previously mentioned, trading activities in the PSE have been heavily skewed toward this sector.

In essence, the divergence between the PSEi 30 and GDP illustrates the significant market dislocations caused by the allure and regime of easy money—a quest for something for nothing.

II. The Treasury Markets as a Harbinger of the Economic Slowdown

Figure 2

As we have repeatedly pointed out, the Philippine Treasury markets have long been signaling an economic slowdown. The steep slope observed in Q1 has shifted to a bearish flattening and, subsequently, an inversion of the "belly," suggesting a further deceleration in inflation and a downshift in economic activity. (Figure 2, topmost diagram) 

Experts have rarely discussed how the declining inflation reflects a downturn in demand. However, this scenario was evident across the entire Treasury curve in 2024, which explains the sharp plunge in T-bill rates and increased expectations that the BSP would cut rates. The BSP responded by implementing cuts in both August and October. 

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

The 2024 U.S. elections provided a striking illustration of the comparative efficiency between markets and surveys. 

As pointed out above, markets are imperfect, but most of their vulnerabilities stem from underlying interventions that enhance them. However, when people place bets to prove their beliefs or convictions, they demonstrate "skin in the game""—a vested interest in success through real-world actions or "having a shared risk when taking a major decision."

In contrast, individuals can express opinions they do not genuinely believe. Numerous factors—such as assumptions, coverage, inputs, delivery, and measurement—contribute to errors in surveys. Worse still, surveys can be designed to achieve specific outcomes rather than accurately estimate reality.

Using the last week’s elections, the average betting odds from several prediction markets, led by the largest platform, Polymarket, indicated that Trump would win by a landslide going into the election. (Figure 2, lowest chart)

This was contrary to the average polls, which showed a razor-thin edge for Democratic candidate Kamala Harris.  Interestingly, similar to the 2016 elections, these polling discrepancies were exposed only after Trump’s victory. (Figure 2, middle table)

By sweeping all the battleground or swing states, Trump secured an electoral landslide winning 301 to 226 (according to The New York Times) and also became the first Republican to win the popular vote since George W. Bush in 2004.

This experience reaffirmed that markets have proven to be more reliable than surveys. And this reliability extends beyond elections to broader economic metrics, exposing vulnerabilities even in government data (such as inflation, labor statistics, and GDP).

Although designed to be objective and systematic—where hard and verifiable transactional records form part of the government’s comprehensive data—a significant portion still relies on self-reported or opinion-based data.

These components introduce the potential for bias and inaccuracies.

More importantly, as a political institution, government data is not only susceptible to errors but can also be engineered to advance the agenda of the incumbent government.

One way to countercheck the reliability of these data points is through the logic of entwined data—the idea that when multiple, independent data sets or sources are connected, discrepancies or patterns can be identified. By cross-referencing market data, surveys, and government statistics, we can better assess the accuracy of any single dataset. The entwinement of data from diverse sources can serve as a powerful validation tool, especially when inconsistencies or contradictions emerge. 

Thus, comprehensiveness, large scale, and systematic nature of government data collection do not make it foolproof from errors caused by either interventions or design. 

IV. GDP: A Tool for Political Narrative 

The establishment has promoted GDP as an estimation of economic well-being, but that’s only a segment of the entire spectrum.  

Unknown to the public, GDP is primarily a political tool.

In the 1660s, William Petty conceived GDP as a means to estimate war financing during the Second Anglo-Dutch War.

Under the influence of John Maynard Keynes, it was further used to promote wartime planning during World War II, which eventually evolved into—or became the foundation of—modern macroeconomic policy (Coyle, 2014).

Simon Kuznets, a pivotal figure in the development of modern GDP, famously cautioned that "economic welfare cannot be adequately measured unless the personal distribution of income is known… The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above." (bold added) [Wikipedia, GDP]

This statement underscores the limitations of GDP as a comprehensive measure of economic well-being.

In 1962, Kuznets further emphasized the need for clarity in economic growth metrics, stating: "Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

This highlights his belief that economic indicators should reflect not just output but also the broader implications of growth on society.

Applied to the current developments…

The Philippine Statistics Authority (PSA), citing the United Nations Department of Economic and Social Affairs as the source for their adaptation of the System of National Accounts (SNA), noted that "GDP is used to evaluate the overall performance of the economy and, hence, to judge the relative success or failure of economic policies pursued by governments." (bold added) [unstats, 2009]

The embedded assumption is that a factory GDP—or a top-down model—drives the economy.

But if that’s the case, then some questions arise: 

-Why doesn’t the Soviet Union still exist? 

-Why do black markets or informal economies emerge or thrive in heavily regulated economies? 

-Does the government dictate to Jollibee or SM who they should sell to? 

Yet, aside from gaining popular approval for election purposes, the contemporaneous implicit goal of GDP growth could be related to ease of accessing public savings to fund government expenditures.

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

Still, there are many ways to "skin"—or analyze—the GDP "cat."

Although GDP is presented as a year-over-year (YoY) change predicated on a base effect, a very significant but largely ignored fact is its trendline. 

Figure 3

Fundamentally, despite all the media and establishment cheerleading—particularly with the emphasis on achieving an upper-middle-income economy—both nominal and real GDP have been performing below their pre-pandemic trendlines. (Figure 3, topmost diagram)

Worse, the Q3 GDP growth of 5.2% is sitting precariously on the support level of a subsidiary trendline, suggesting it may be testing this support. What happens if it breaks?

Additionally, what about the recent SWS Q3 2024 surveys exhibiting self-poverty ratings at 2008 highs, and hunger incidence reaching its second highest level since September 2020, during the pandemic recession? (see our previous discussion here)

Has the SWS survey been validated?

As a side note, the left-leaning OCTA Research group's Q3 survey results were starkly different from those of the SWS.

Have the authorities made a partial concession to the SWS findings by revising down the GDP growth estimates?

As a reminder, polls or surveys—whether conducted by the private sector or the government—are opinion-based or self-reported data and are inherently prone to errors. 

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates 

GDP is not just about the numbers; it has been crafted to tell a story. 

Essentially, it follows the mainstream’s logic: slowing inflation and lower interest rates would boost consumption and, consequently, GDP. 

Well, that is how the Q3 5.2% GDP played out.  

From the expenditure side of GDP, real household consumption increased from 4.7% in Q2 to 5.1% in Q3, thereby boosting its share from 67.7% to 72.8%. (Figure 3, middle image) 

In contrast, government spending on GDP dropped significantly, from 11.9% in Q2 to 5% in Q3, reducing its share from 17% to 14.7% during the same period. 

Meanwhile, due a slump in government activities, construction GDP growth nearly halved from 16.2% to 8.9%, diminishing its share from 19.4% to 14.1%. Government construction GDP tumbled from 21.7% to 3.7%. 

Thanks to increases in machinery, transport, and miscellaneous equipment, durable equipment GDP surged from a contraction of 4.5% in Q2 to growth of 8.1% in Q3. (Figure 3, lowest visual) 

Nevertheless, exports plummeted from 4.2% in Q2 to a shrinkage of 1% in Q3, while imports increased from 5.3% to 6.4%. The widened gap in favor of imports—net exports—contributed to the slowdown of GDP. 

This summarizes the expenditure-based GDP analysis.

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

Circling back to consumers: considering that the Philippine economy has allegedly reached near-record employment levels (close to full employment), why does consumer per capita growth continue to struggle?

Figure 4 

The employment rate hit 96.3% in September, yet Q3 household per capita growth increased only slightly, from 3.8% to 4.2%—the third lowest growth rate since Q2 2021. (Figure 4, topmost window)

Additionally, what explains the consumers' ongoing challenges in light of Universal-commercial bank lending, which reached a record high in nominal terms and grew by 11.33% in Q3—the highest rate since Q4 2022? This growth was notably powered by household credit, which also surged by 23.44%, although it was down from its peak of 25.4% in Q1 2024. (Figure 4, middle graph)

On a related note, even though the money supply (M3) hit a record of Php 17.58 trillion in Q3, its growth rate of 5.4% was the lowest since Q3 2022.

Despite the crescendoing systemic leverage (public debt plus bank credit expansion), which grew by 11.4%—the highest since Q4 2024—to a record Php 27.97 trillion, why has the money supply been trending downward?

Moreover, as evidence of the redistribution effects of Bangko Sentral ng Pilipinas (BSP) policies favoring banks amidst the thrust towards financialization, various money supply metrics (M1, M2, and M3) relative to GDP remain at pre-pandemic levels in Q3 2024, despite having clawed back some gains from the 2021 milestone. (Figure 4, lowest chart)

Despite all this, the persistent challenges of consumers continue.

Yet, this raises a crucial point: the GDP appears increasingly dependent on money supply growth and credit expansion.

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

There’s more.

Figure 5

In the face of a slow recovery in consumption, retail GDP dropped from 5.8% in Q2 to 5.2% in Q3 2024. (Figure 5, topmost image)

Oddly, bank lending to the sector has been soaring; it was up 12% in September from 9.3% last June.

Where is the money being borrowed by the sector being spent?

Meanwhile, Household GDP figures might be inflated.

Two major retail chains operating in different sectors have reported stagnation in topline performance.

Despite expanding its stores by 12% year-over-year (YoY), the largest downstream real estate consumer chain, Wilcon Depot [PSE: WLCON], experienced a 3.35% YoY contraction in sales and a 4.35% decline quarter-over-quarter (QoQ). (Figure 5, middle graph)

The company's worsening sales conditions have partially reflected the plunge in the sector’s Consumer Price Index (CPI).

Similarly, Robinsons Retail [PSE: RRHI], one of the largest multi-format retailers, reported another lethargic topline performance. (Figure 5, lowest chart)

In Q3, the firm’s sales increased by 3.13%, primarily driven by its food segment (supermarkets and convenience stores), which grew by 4.8%, along with drug stores, which increased by 9%. 

However, three of its other five segments—including department stores, DIY, and specialty—suffered sales contractions. 

Taking into account that the sales from these two retail chains constitute a portion of nominal GDP, applying the GDP deflator would indicate a deeper decline in WLCON's sales and flat sales growth for RRHI. 

Despite the slowdown in inflation and the rapid growth in consumer bank borrowings, consumer spending has gravitated toward essentials (food and drugs) while reducing purchases of non-essentials. 

This observation lends credence to the recent Social Weather Stations (SWS) self-poverty ratings. 

So far, despite loose financial conditions, the performance of these two retail chains contradicts the notion embedded in GDP that consumers have partly opened their wallets in Q3. 

For a clearer picture of consumer health, we await the financial reports of the largest retail chain, SM, and other major goods and food retail chains. 

Imagine the potential impact of real tightening conditions on consumer spending and GDP! 

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back? 

Recent GDP data suggests a slowdown in public spending, but a closer look reveals a different narrative. 

While overall public spending growth has declined, sectors heavily influenced by the government are seeing gains. 

Specifically, public administration and defense GDP rose from 1.8% in Q2 to 3.7% in Q3. Similarly, sectors with significant government involvement, such as education and health, reported growths from 1.9% to 2.6% and 9.4% to 11.9%, respectively. 

Despite the appearance of a slowdown, the bureaucracy and government-exposed sectors continued to show growth. 

That’s not all.

Figure 6

According to the Bureau of Treasury’s cash operations report, the Q3 expenditure-to-GDP ratio remains at a pandemic-level rate of 24%. 

Additionally, although tax revenues improved, the Q3 deficit-to-GDP increased from 5.3% to 5.7%, again reflecting pandemic-level deficits. 

It’s essential to note that the treasury data and the Philippine Statistics Authority (PSA) GDP figures—which include their calculation of public spending—represent an apples-to-oranges comparison. 

However, we can still glean insights from a historical perspective of the Treasury’s activities. 

So, why do current data sets indicate sustained increases despite the perceived temperance in government spending? 

While authorities may embellish their deficit data, the consequences are likely to manifest elsewhere. 

Aside from the counterparties that provide financing via debt, it will manifest in the trade balance and eventually impact the private economy—via consumers: the crowding-out effect. 

Q3 Public debt stands at 61.3% of the sum of the last 4 quarters (Q4 2023 to Q3 2024) 

Thus, it’s not surprising that Q3’s fiscal deficit coincided with a notable spike in the trade deficit, which ranks as the fourth highest on record. 

The existence of "twin deficits" points to excessive spending and reveals a historic savings-investment gap that necessitates record borrowing through debt issuance and central bank interventions. 

Adding to this context, the massive RRR cut and BSP’s second round cut of 25 basis points all took effect this October or in the fourth quarter.

We can also expect the government to aim to accomplish its end-of-year spending targets in December, adding to this period’s fiscal activity.

This implies that the full impact of the 2024 "Marcos-nomics" stimulus implemented in Q4 could result in a short-term GDP boost but at a substantial cost to the private sector economy. 

___

references

Steven Landefeld and Robert P. Parker, Preview of the Comprehensive Revision of the National Income and Product Accounts: BEA’s New Featured Measures of Output and Prices, Bureau of Economic Analysis, 1995

Diana Coyle, Warfare and the Invention of GDP, the Globalist, April 6, 2014 

Wikipedia, Gross Domestic Product, Limitations at introduction 

United Nations Department of Economic and Social Affairs, System of National Accounts 2008, 2009, p. 4-5 https://unstats.un.org/