Government bailouts are like potato chips. You can’t stop with just one—Thomas Sowell
In this issue
Philippine CPI’s September 6.1% "Shocker"; Eight Reasons Why the Rice Price Ceiling Failed
I. Another CPI "Shocker" as September CPI’s 6.1% Beat Estimates
II. Eight Reasons Why the Rice Price Ceiling Failed
III. The Growing Systemic Risks from Perpetual Interventions
IV. Other Features of the September 6.1% CPI Shocker
V. Supply Side Inflation? Inflationary Biases from the Economic Transformation towards "Financialization"
VI. The Inflationary Tendencies from the Structural Shift of Bank lending to Consumers Over Producers
Philippine CPI’s September 6.1% "Shocker"; Eight Reasons Why the Rice Price Ceiling Failed
September's CPI was another mainstream shocker. This post explains the eight reasons why the rice price ceiling failed and the embedded inflationary bias of the political economy.
I. Another CPI "Shocker" as September CPI’s 6.1% Beat Estimates
Figure 1
In another "shock" to the transitory/supply-side crowd of experts, September CPI ripped higher to 6.1%, an ocean away from the median estimates of 5.3% and 5.4%. Not even the highest of the private sector estimates came close. (Figure 1, upper graph)
With a 5.3% to 6.1% range, the CPI came on the top end of the BSP's estimation.
That the BSP hit the CPI within its range puts them ahead of the private sector, which, of course, is the purpose of this guessing game.
This "pin-the-tail-on-the-donkey" guessing game represents a futile exercise designed to justify the authority's supposed handle on the economy for reasons previously expounded.
Yet, the September CPI puts into the limelight the failure of the rice price ceiling policy, as expected.
II. Eight Reasons Why the Rice Price Ceiling Failed
Here are the eight reasons.
First, even in the short term, had it worked, the administration should have prolonged its implementation. Instead, after a month, the administration lifted (euphemism for repealed) the price ceiling (on October 4th).
Second, having been shoved down on the public's throat with little cost-benefit analysis or consultation, the policy signified a product of a power play. As proof, the administration's economic team admitted to not being consulted, even initially "shocked" at the price caps, which implies a backdoor opposition to it by some influential quarters. But the same economic team eventually defended it, possibly for face-saving purposes.
And for appeasement, the administration kept telegraphing the immediacy of its lifting.
Third, September's CPI was almost a textbook response to a price cap.
As previously noted, although part of the design of the price ceiling was to sugarcoat the statistical inflation, the substitution effects and reservation demand (hoarding) from uncertainties over its implementation must have caused price surges to ripple into a broader dimension of other food products, mainly cereals and vegetables. Other food prices also rose but to a lesser degree. The BSP's table showed this. (Figure 1, lower table)
Fourth, September's CPI partially mirrored the CPI response to the rice 1995 price cap. The Food CPI almost doubled from 6.9% in July to 13.9% in March 1996 or in 8 months. (Prudent Investor, September 2023)
Had the price ceiling been extended, the effects could have been at par or worse.
Fifth, despite media coverups, reports of enforcement leakage and defiance still occurred.
And aside from the natural administrative "public choice" frailties, the constant signaling of the lifting of the price caps should have weakened enforcement.
Sixth, the administration used its purse or threw money (deficit spending) to counteract its errors.
Authorities extended a bailout to farmers (Php 12.7 billion) and sari-sari stores. The NFA also increased its buying price (Php 15-16 billion). The earlier debt jubilee of farmers' liabilities should also add to it (Php 58 billion).
Though they seem to believe that financial bailouts would cover part of the rice imbalances from their root causes, extending the price caps meant more and more unsustainable deficits.
Seventh, for political grandstanding, officials opted for photo ops of raids on alleged rice "hoarders" and "smugglers " who functioned as convenient political scapegoats. Since photo ops are signals to shore up popularity, these subtly transmit the limitations of the price cap's short-term efficacies.
Last but not least, the President's popularity rating plunged, according to the administration’s favorite polling firm. Acknowledging this, the leadership ended the rice price cap in a snap of his fingers.
Oddly, the consensus experts seem lost about the effectiveness of the rice cap, looking for answers in government data. Government data! Will bureaucratic agencies publish data that defies one of the leadership's signature policies?
On the other hand, the Philippine Statistics Authority can't tell whether it worked or not.
Were these people absent when their teachers taught the demand-supply curve in their economic classes?
Maybe it is time to abolish economic classes or substitute it with a preamble, "economics is what the government says it is." Political Statistics 101.
The extent of propaganda has just been incredible.
III. The Growing Systemic Risks from Perpetual Interventions
In any case, all actions have intertemporal consequences.
The fundamental frailties of the agricultural sector emanate from its intense politicization or protectionism and the lack of market institutions (e.g., commodity futures), resulting in few investments that have led to sluggish productivity growth.
The BSP's easy money regime has also aggravated this by encouraging farmland conversions to the real estate bubble. Underinvestment in the agricultural sector led to credit-financed overinvestments in the property sector. Why wouldn't inflation balloon? (Prudent Investor, September 2023)
The thing is, imbalances are cumulative and surface over time. Maladjustments from the latest rice price ceiling should pile up on the 2021 pork price ceiling, worsening the fundamental backdrop.
As the series of interventions expands, uncertainties and distortions in the marketplace intensify, leading to increased dependency on political actions and redistribution. Modern technology will do little to aid productivity when dole-outs and political string-pulling become the operating model for the industry.
Instead of productivity growth, risks to credit and the real economy will expand. Or all these should amplify systemic risk.
IV. Other Features of the September 6.1% CPI Shocker
Yet here are the other notable developments from the September CPI.
Figure 2
First, the rice CPI surged past the 2018 highs to reach 2009 levels. Of course, as mentioned above, rice wasn't the only factor in the 6.1% CPI. But it was the media's fixation.(Figure 2, topmost graph)
Second, the Headline CPI exceeded the CORE CPI for the first time since February 2023, which pointed to slower demand and the growing slack in the economy. (Figure 2, middle window)
Third, the bounce of the international price (US WTI) of oil has recently contributed to the "external" source of inflation. But oil prices have plummeted over the past week. Reduced global demand may aggravate the developing weakness in the domestic economy. (Figure 2, lowest chart)
Figure 3
Fourth, the MoM change spiked further to 1.14% in September. Since 2018, in all four previous episodes where this exceeded 1%, an inflection point (top or bottom) occurred. (Figure 3, upper chart)
Lastly, September's CPI bounce has barely convinced Treasury traders that the rebound in the CPI is sustainable. The bearish steepening of momentum of August has stalled in September. (Figure 3, lower chart)
The long trend of the CPI is up, but of course, deflationary forces from a stalling domestic and global economy could represent an interim countertrend.
We deal with fundamentals on the long-term trend below.
V. Supply Side Inflation? Inflationary Biases from the Economic Transformation towards "Financialization"
Reuters, October 6: But Balisacan, who is not a member of the central bank's policy-making monetary board, said raising interest rates "can hurt" the economy and consumers. "The source of the inflation is supply side. It is not the demand side that requires a monetary solution," Balisacan said. He said he was also wary of the impact of higher interest rates on the peso for that could make the local currency stronger and make the country's exports more expensive, Balisacan said. (bold added)
Such claims are fantastic. And they know it.
To be sure, supply-side factors may be an aspect, but what of demand?
Do bank credit expansion and BSP liquidity injections only have a neutral effect on the economy?
Aside from the previous impact of low rates, are we not seeing the delayed effects of the BSP's Php 2.3 trillion liquidity injections to rescue the banking system?
Figure 4
Based on BSP data, at no time in Philippine history has the money supply transformed into a critical factor driving the GDP!
While M2 and M3 as a share of the GDP have slowed to 68.6% and 70.5% in Q2 from their peak of 75.6% and 79.4% in Q1 2020, these are way above the 2002 to 2019 average of 48% and 49.7%! (Figure 4, topmost window)
And at no time ever have Philippine banks commandeered the share of the nation's financial resources as it has today! Banks control 82.52% of it as of July! (Figure 4, lowest chart)
The M2/M3 and the bank's capture of financial resources spiked in 2013, accelerated in 2019 before the pandemic, and peaked during the BSP's unprecedented injections.
It is also not a coincidence that the BSP's low-rate regime has been instrumental in the facilitation of the structural transformation of financial resources in favor of the banking industry. The pandemic recession only strengthened the bank’s stranglehold of financial resources.
In a nutshell, the Philippine economy’s inherent inflationary bias emanates from the "financialization" of the economy or the deepening dependence on bank credit expansion to drive the GDP and public revenues (taxation).
VI. The Inflationary Tendencies from the Structural Shift of Bank lending to Consumers Over Producers
There's more.
The historic transformation is not only about banks relative to financials and the economy but the industry's operating or business model, as well.
Bank lending growth to consumers has been relentless in the context of speed and share. (Figure 5, upper and lower charts)
Or, the bank's preference to lend to consumers over production means extending purchasing power from the future to the former relative to diminished domestic production output. Won't that be "too much money chasing too few goods?"
In the meantime, the increased reliance on imports to satisfy this gap translates to gaping trade deficits that require even more external borrowing. Won’t this magnify the risks of an external debt crisis?
Figure 6
The universal commercial bank data of August only strengthens this dynamic. The record pace of consumer loan growth (22.7%) continues to eclipse production loans (5.54%) in percentage and in peso. (Figure 6, topmost graph)
Thanks to the interest rate cap on credit cards, banks "backed up the truck" on consumers.
Meanwhile, to maintain their present lifestyles, consumers borrowed to substitute the vacuum from the loss of purchasing power. This, of course, created a feedback loop of fueling higher prices and responding to it with more borrowings. Even the nominal loans segment showed credit cards transcend loans of all other industries.
It is not just the credit card. While salary loan growth has slowed, levels are at a record high. Auto loans also picked up. This bank data excludes consumer real estate borrowing. (Figure 6, middle window)
On the other hand, the rapidly slowing manufacturing loan growth has mirrored the PPI (producer price index), which means producers could be anticipating a slowdown in demand (internal &/or exports). (Figure 6, lowest chart)
Fundamentally, consumers have been spending today tomorrow's income by leveraging up their balance sheets. A steep downturn or a recession should send credit delinquencies to the moon.
Ultimately, the defense of consumers could be a disguise for the primary beneficiary of low rates—the government's debt-financed deficit spending.
Is it their implicit goal to drown the public with debt?
That said, present policies showcase the structural inflationary tendencies of the political economy.
___
References
Prudent Investor, The Philippine August CPI "Shock;" Stagflation Ahoy: Rising Oil Prices, Firming USD, Structural Deficits, and Asymmetric BSP Policies September 11 Substack Blogger
Prudent Investor, Philippine Rice Crisis 2.0: Why the Price Ceiling Policy Will Fail! The Role of Protectionism and the Real Estate Bubble September 3, Substack Blogger
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