Let us recall once more that in any inflation, individual prices and costs never go up at a uniform rate but at widely different relative rates and times. Cost-price relationships become discoordinated. Individual firms find it increasingly difficult to know or guess what their own future costs or future selling prices are going to be, and what will be the ratio between them. During an inflation demand shifts quickly from one product to another. This makes it increasingly difficult to plan production ahead, or to estimate future profit margins. In the later stages of an inflation, wage rates are more certain to go up than individual prices. Even if aggregate profits increase in monetary terms, the range of deviation and dispersion is much greater as between different firms. The investor faces increasing uncertainty. This always tends to lower stock prices—Henry Hazlitt
In this issue
The 2022 PSEi 30’s Amazing Inflationary Boom! Record Debt and Liquidity Expansion Fueled Revenue and CPI Spike!
I. The Facts Behind the PSEi 30’s Corporate Performance
II. The Chronicles of the 2022 Inflationary Boom: BSP’s Excess Liquidity Fueled Electoral and Public Spending Sprees
III. The Chronicles of the Inflationary Boom: Revenge Consumer Spending
IV. Digging a Deeper Debt Hole
V. The PSEi 30 Revenue Boom: Proof of Demand Side Inflation
VI. How Debt was Parlayed into Revenues and GDP: the 2022 Experience
VII. PSEi 30 Inflationary Boom By Sector
VIII. PSEi 30 Inflationary Boom: Highest Pecking Order of Member Firms By Category
IX. Conclusion and What Happens Next?
The 2022 PSEi 30’s Amazing Inflationary Boom! Record Debt and Liquidity Expansion Fueled Revenue and CPI Spike!
The Philippine PSEi 30 experienced a historic inflationary boom in 2022! Powered by massive debt and excess liquidity, revenues saw a moonshot which was reflected in the CPI. Is this sustainable?
Before proceeding with the analytics of the financial performances of the elite members of the PSEi 30, this requires an understanding of the economic and financial backdrop. Since corporations operate in the realm of human actions, their performance reflects the operating environment of the given period. That said, it would be a mistake to interpret statistics at their face value alone.
First, let us enumerate the crucial facts.
1. The BSP launched an aggressive rescue of the banking system from 2020 to 2021. The safety and stabilization measures included unparalleled Php 2+ trillion liquidity injections in 2020-2021, the unprecedented monetary policy of keeping rates at the lowest level ever, and finally, the imposition of various relief measures.
2. 2022 represented the transition towards a normalization phase of the economy from the pandemic shutdown in 2020-2021 through its reopening.
3. In May 2022, the Philippines voted for various national positions, including the Presidency, Vice Presidency, Senatorial, and local jobs.
4. Flushed with excess liquidity and relieved of various regulatory, operational, and capital constraints but limited by falling asset prices due to rising inflation, these conditions induced the banking industry to embark on a lending spree.
Figure 1
5. Consumer lending, thus, propelled the banking industry's credit expansion in 2022. (Figure 1, upper chart)
6. Authorities pursued another historic year of public spending, which spurred the second-biggest deficit and a record debt stock in 2022. (Figure 1, lower diagram)
7. With inflation spiking to decade highs, the BSP panicked and raised policy rates to multi-year highs in the 2H. But consumers were partly exempted from the rate hikes through a cap on interest rates on credit cards.
II. The Chronicles of the 2022 Inflationary Boom: BSP’s Excess Liquidity Fueled Electoral and Public Spending Sprees
A chronology of events or the backstory supports these facts.
Although aware of its potential effects, authorities underwrote the boldest liquidity injections to stabilize liquidity conditions of banks in the face of the 2020 recession.
Because the "trickle-down effect" represents the implicit guiding economic creed of the mainstream, the BSP prioritized instituting safety structures to the industry owned by the economic crème de la crème over the average citizenry.
But because of its immediate nonappearance, the BSP disregarded the inflation risks. Authorities repeatedly described inflation as "transitory," primarily driven by "exogenous developments" that affected the supply chain.
Authorities, however, took advantage of the flood of money oozing out of the BSP and banks by bankrolling an electoral spending binge.
Aside from it, authorities splurged on public works, welfare, and bureaucratic expenditures.
Figure 2
Proof of excess liquidity?
Since 2016, the principal channel of liquidity flows shifted from the BSP to the bank and financial industry through its holdings of government securities (net claims on the central government).
But worsened by external factors such as surging energy and food prices, partly as ramifications of the Russia-Ukraine war, higher rates forced banks to conceal their record holdings of Philippine Treasuries through Held to Maturity (HTM) accounts. (Figure 2, topmost chart)
At the close of 2022, the industry's Net Claims on the Central Government reached a record Php 4.55 trillion(20.64% of NGDP), while its HTM assets rocketed to Php 3.8 trillion (17.28% of NGPD), another milestone.
In 2022, domestic claims, which include bank holdings of government securities and their loan portfolio, represented 77.3% of the GDP, slightly off the record 77.8% in 2021. Whereas the money supply metric, M1, which includes cash and checking accounts, represented 30.1% of the GDP, again, marginally down from the milestone of 32% in 2021. (Figure 2, middle window)
In the meantime, M3 to GDP, the commonly used money supply barometer, slid to 74.4% in 2022, down from its apogee of 79.1% in 2020 and 2021. This ratio was only 44.3% in 2001.
Where do you think all this excess liquidity flowed into? The tooth fairy cleaned them out?
But there is more. In response to the inflation spike, the BSP rapidly raised rates in the 2H of 2022.
The BSP's experiment with the lowest policy rates favoring the banking system in 2020-1H of 2022—through deposit subsidies—abruptly ended with the panicked hikes. These rate increases likewise increased losses of the industry's fixed-income holdings. Since financial assets provided little room to generate profits, lending became the only option to generate cash flow and income.
Further, to encourage lending, the BSP extended various relief measures to clear the legal and regulatory roadblocks.
Still, the BSP was reluctant to tighten meaningfully.
Adding these together, the tightening measures undertaken by the BSP were only for public consumption. It continued to inject liquidity indirectly through banks and financial institutions.
III. The Chronicles of the Inflationary Boom: Revenge Consumer Spending
So while banks and financial institutions continued to provide liquidity into the system through acquired government securities, the BSP raised rates but halfheartedly pulled back on excess liquidity through direct means, for example, BSP securities (T-bills) and Term Deposit Facility—TDF). (Figure 2, lowest pane)
At the close of 2022, the BSP's domestic asset holding at Php 1.35 trillion remained near the 2021 record of Php 1.47 trillion. The liquidity mopping-up instruments accounted for about 70% of these securities, which means the BSP retained substantial surplus liquidity.
Again, the BSP also maintained a cap on interest rates for credit cards, which decidedly shifted bank lending growth from the industry to consumption. It increased the rates on this cap last January.
Record salary loans complimented the borrow and spend shindig.
So what the mainstream described as "revenge spending" and " revenge travel" signified a euphemism for "revenge borrowing!"
IV. Digging a Deeper Debt Hole
With entrenched and intensifying inflation, the public thus rapidly dispatched borrowed currency (peso) for goods and services, reinforcing price pressures.
The inflationary interventions by the BSP designed to institute safety mechanisms resulted in the degradation health of the banking institutions, as expressed by the rapid decline in the purchasing power of the peso and the structural shift in their balance sheet towards peso holdings instead of FX assets.
The non-transparency from the various relief measures also concealed the actual health conditions of the banking system. Although the mainstream attempts to embellish the banking system with florid health statistics, their numbers expose its distortive effects. For instance, liquidity conditions continue to deteriorate. The published NPLs have started to rise. NPLs have diverged from declared loan loss provisions. Importantly, banks continue to exhibit the unrelenting growth of the "extend and pretend" HTM assets.
Further, the financial industry's dependence on the BSP's subsidies intensified, exhibiting moral hazard in real-time action.
Yet, debt and liquidity financed record public spending, and consumer spending functioned as roaring twin engines that boosted corporate performance, GDP, and inflation in 2022.
The gist of the political economy of 2022: Domestic residents—burned a gigantic hole in their pockets—by mortgaging their future to sustain their present lifestyles.
Interestingly, the mainstream saw only the headlines, such as "consumer spending" and the "GDP," but ignored or dismissed the developments inside the hood.
V. The PSEi 30 Revenue Boom: Proof of Demand Side Inflation
And as it turned out, the financial performance of the PSEi 30 captures its zeitgeist.
Figure 3
The aggregate 2022 revenues of the 30 elite members of the headline equity index hit a record Php 6.31 trillion, a 33.74% spike from last year's Php 4.72 trillion! That's about 28% of the NGDP of the same year! Net growth amounted to Php 1.55 trillion—another landmark. (Figure 3, topmost chart)
It's no surprise to us that changes in the CPI have resonated with the net changes in revenues since 2018. (Figure 3, middle window)
Nota bene: figures cited are gross numbers. It doesn't include 2021 restatements and has accounted for members of said period.
The revenue surge didn't emerge from a vacuum, as it required funding.
The pandemic recession dug a deeper hole and accelerated the downtrend in the Philippine gross savings rate. (Figure 3, lowest chart) Since the shutdown of the pandemic economy destroyed so much capital, the 2022 boom came primarily from credit expansion and excess liquidity from the BSP.
Total bank credit grew by a brisk 13.54% or a milepost Php 1.265 trillion to a record Php 10.6 trillion. Household credit expanded by 25.12% or a landmark Php 206 billion to a historic Php 1.028 trillion.
That is to say, aggregate revenues, a partial barometer of the Nominal GDP, have chimed with the CPI.
VI. How Debt was Parlayed into Revenues and GDP: the 2022 Experience
In today's leveraged-based economy, debt plays a crucial role in aggregate demand. Debt is used to generate revenues/sales.
For instance, consumers use credit cards to buy goods and services today. Suppliers or wholesalers extend credit to retailers. Raw material/input suppliers also provide credit to manufacturers. Developers offer staggered payments to buyers of their property projects. And so forth.
On that score, the most remarkable performance in the PSEi 30 is barely about revenues or income but debt.
Simply, debt serves as the foundational edifice that constitutes corporate performance and the GDP!
Figure 4
The PSEi 30's published non-financial corporate debt reached an unprecedented Php 5.57 trillion (25.3% of NGDP), with net debt up 13.22% or an All-Time High (ATH) of Php 759 billion! (Figure 4, topmost pane)
Again, these represent the declared debt, which excludes debt reclassified as other liabilities. Further, duplications in reports of parents and subsidiaries create distortions in data. In any case, the numbers reported here, such as revenues, income, debt, and others, are from member PSEi 30 corporations, mostly with interlocking interests.
And strikingly, both (gross and net) debt surged along with the increases in 10-year treasury yields from 2020 to last year. (Figure 4, middle window)
The increase in net debt was about half of the gains in net revenues!
The accelerating growth in non-financial PSEi 30 corporate debts elevated its slice of the Total Financial Resources pie to 19.41% in 2022. (Figure 4, lowest chart) Amazing.
Despite the 37.5% spike in net profits of the banking industry, banks were net borrowers in 2022.
Figure 5
The industry's net borrowings (bills and bonds) increased by 12.01% or Php 133.4 billion. I wasn't able to isolate the borrowings of the PSEi 30 banks. (Figure 5, topmost chart)
In the meantime, the PSEi 30's net income failed to match the unparalleled growth in debt and the unprecedented expansion in revenues. (Figure 5, middle window)
The aggregate net income of Php 768 billion slightly surpassed the 2019 level of Php 727.6 billion, but the delta of the net income in peso dropped to Php 146.1 billion in 2022 from Php 209 billion in 2021. (Figure 5, lowest diagram)
One could suspect that aside from colossal borrowings having inflated the declaration of income, perhaps companies may have also overstated them.
In any case, the rebound in bank lending was instrumental in boosting the 2022 net income. (Figure 5, lowest chart)
VII. PSEi 30 Inflationary Boom By Sector
Figure (Table) 6
Let us move on to sectoral performance. (Figure 6, upper table)
Though the mining industry, solely represented by Semirara, topped revenue and income growth in %, most of the peso revenue growth accrued to the holding firm (Php 1.054 trillion) and industrial sectors (Php 256.6 billion).
Aside from the mines, the property and holding firms led the net income growth rates of 41.8% and 23.02%.
But the holding firm and financials took the top two spots in peso net income growth of Php 64.5 billion and Php 41.13 billion, respectively.
The holding firm sector was responsible for most of the debt increase in % and peso.
VIII. PSEi 30 Inflationary Boom: Highest Pecking Order of Member Firms By Category
Lastly, the PSEi 30-member firm's 2022 financial performance by category ranked by the highest pecking order. (Figure 6, lowest table)
Though SMC (60.07%), Aboitiz Power (44.4%), and GT Capital (40.5%) registered the most in % revenue growth, SMC, SMIC, and Meralco posted the largest expansion in peso--Php 565.4 billion, Php 121.4 billion and Php 85.13 billion.
Petron and San Miguel Global Power accounted for the bulk or 72% of SMC revenues. The revenue outgrowth from these firms accounted for power/energy and consumer spending, the central issues of inflation.
On the other hand, ACEN Corporation (90.4%), DMC (88.9%), and BPI (65.23%) registered the highest income growth rate for the year.
However, SMIC, Semirara, and DMC logged the most peso gains of Php 29.7 billion, Php 23.7 billion, and Php 22.8 billion, respectively. Three companies posted losses: SMC Php 21.4 billion, MONDE Php 16.3 billion, and PLDT Php 15.94 billion.
Lastly, the accretion of the rate of debt growth was highest in CNVRG (92.7%), ACEN (55%), and URC (46.7%).
But in peso expansion, San Miguel topped the list with a Php 351 billion stunner! Ayala Corp (Php 73.9 billion) and Metro Pacific (Php 46.1 billion) took second and third spots.
SMC's debt accounted for 46% of the non-financial debt growth! (We shall deal with this in another issue)
IX. Conclusion and What Happens Next?
Deficit spending and bank credit expansion clearly accounted for topline and bottom-line "improvements," the GDP, and inflation.
The thing is, what happens to consumers and the industry when the capacity to absorb debt reaches a maximum point or when interest rates combined with inflation corrodes their disposable income?
What happens to "revenge spending" when the bank's appetite to lend fades (due to rising NPLs) and when there are insufficient savings and productivity growth to back these up?
What happens to the corporate topline and the GDP when banks begin to tighten lending? Or, stated differently, what happens when the erosion of liquidity begins to impact the corporate top line, their balance sheets, and the GDP?
Many corporations recently acquired additional or replacement inventories at high levels; what happens to corporate margins when prices start to ease?
What happens when volatility from inflation is sustained through the years?
How will uncertainty in price levels help entrepreneurs with their planning, resource allocation, and marketing?
By extension, what happens when companies start to shed jobs and reduce Capex to cut costs?
What happens when the credit-financed "revenge spending" (consumer and fiscal) boom turns into a bust?
We shall soon find out.
