Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 Public Spending Hits All-Time High! BSP Rate Cuts Next?

  

…the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount…In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public—Murray N. Rothbard

In this issue:

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

IV. 6-Months Debt Servicing Costs Hit Another All-Time High! 

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts 

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion 

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

The acceleration of June and Q2 2024 spending affirmed the emergence of the "Marcos-nomics stimulus." With debt burdens soaring, a rising public debt stock, and fiscal deficits widening, the BSP may soon cut interest rates.

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

Businessworld, July 25, 2024: THE NATIONAL Government’s (NG) budget deficit narrowed by 7.24% year on year in June, as revenue collection grew at a faster clip than spending, the Bureau of the Treasury (BTr) said on Wednesday.  Treasury data showed the budget gap shrank to P209.1 billion in June from P225.4 billion a year ago. Month on month, the budget deficit widened by 19.54% from P174.9 billion in May. In June alone, revenue collections jumped by 10.93% to P296.5 billion from P267.3 billion in the same month last year…On the other hand, state spending increased by 2.62% year on year to P505.6 billion in June. “The increase was mostly attributed to the implementation of capital outlay projects of the Department of Public Works and Highways, and the Department of National Defense under its Revised AFP Modernization Program, the preparatory activities of the Commission on Elections for the 2025 National and Local Elections, and the higher National Tax Allotment shares of local government units (LGUs),” the Treasury said. (bold added)

Defense spending. Domestic elections spending (direct and indirect).

Figure 1

Statistical base effects have played a large part in the government and media’s "smoke and mirrors" narrative of fiscal performance last June.  (Figure 1, topmost image)

That is, the lower public spending growth rate was entirely a function of its comparison from a higher base a year ago.

In contrast, distortions from the base effect magnified the revenue growth rate calculated from a lower base last year.

The devil is always in the details.

Yet here are the most important factors that were withheld from the public: 

-June 2024’s public spending was the sixth highest on record. (Figure 1, middle chart)

-Excluding public spending for December, June 2024 represented the third highest after May 2024 and June 2023.

-May and June represented the third-highest two-month public spending.

-Q2 2024 public spending was at an all-time high! (Figure 3, lowest graph)

Figure 2

-June’s deficit was the highest this year. (Figure 2 topmost chart)

-The gap between the 1H 2024 deficit and 2023 widened and was 14.3% and 8.95% below the 2022 and the 2021 historic high. Please take note that the latter two represented a fiscal stimulus in response to the pandemic recession. (Figure 2 middle window) 

Yet, June data was a bullseye for us! 

Authorities admitted that aside from infrastructure, defense, and pre-election spending accounted for its outgrowth. 

That, in essence, is our Marcos-nomics stimulus.

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

…

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

In his third State of the Nation Address (SONA), the Philippine President advocated for numerous public spending programs, including "Walang Gutom 2027," a war on poverty measure aimed at feeding one million food-poor citizens by February 2027. He also proposed a nationwide "Free Wi-Fi Program" and promoted "green-lane certified" investments, amounting to approximately Php 3 trillion in business projects (PPPs?) related to renewable energy, digital infrastructure, food security, and manufacturing. He also addressed tourism infrastructure, water projects, and more.

"Marcos-nomics" is on a roll, with more free lunches ahead!

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP? 

What was the contribution of public revenues to the June and Q2 deficit?

Although aggregate collections reportedly grew by 10.93% in June, non-tax revenues, which experienced a remarkable 81.4% growth rate, comprised the bulk of these gains.

Further, Q2 2024 revenues soared by 16.74%.

This is because, after the April growth surge in collections by the Bureau of Internal Revenue (12.7%) and the Bureau of Customs (19.5%), the subsequent monthly performance almost ground to a halt: both tax agencies registered paltry gains in the following months—BIR grew by 2.8% and 4.7% in May and June, respectively, while the BoC was 4.3% and 0.7% higher over the same period.

Despite this growth, revenue year-on-year (YoY) growth spikes have historically accompanied a GDP slowdown, except for one occasion in 2014. This anomaly aside, revenue growth has typically preceded a slowdown in GDP growth.

The crowding-out effect could be a possible reason for this phenomenon.

Figure 3

So far, revenues from the private sector, which have been involved in government projects, bank lending expansion, and inflation (e.g. CORE CPI), have driven the aggregate performance of public revenues. (Figure 3, topmost and second to the highest diagrams)

Notwithstanding historic public spending, record revenues have also kept the fiscal deficit from spiraling out of control. For now. (Figure 3, second to the lowest chart)

But what if the law of diminishing returns on these factors worsens the current economic conditions?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

In the meantime, after providing a crucial perspective on the aggregates in public spending, we will delve into more details. (Figure 3, lowest graph)

Due to base effects, LGU allocations were up by only 2.6%, a decline from 8.54% in May. However, their share of total expenditures rose from 14.6% in May to 16.6% in June.

Firstly, the Mandanas ruling has also been instrumental in driving this uptrend. The previous spike in LGU collections occurred in the second half of 2021, prior to the 2022 national elections. The collections decreased in late 2022 (post-elections), which extended through most of 2023.

Implemented in 2022, the Mandanas ruling (EO 138) decrees an increased share of revenue allocation from the national government to 40%, which includes collections from the Bureau of Customs.

The second wave of increased allocations to the LGU appears to have emerged since Q1 2024 as the 2025 national elections approach.

Another pillar supporting this is the programmed annual increases in budget allocations.

Increased LGU allocations likely include budgets to market or improve the electoral chances of administration candidates in the 2025 general elections.

Also due to base effects, the National Government’s disbursement grew by 8.6% YoY, though this was substantially lower than 22.32% in May. Nonetheless, its share of the aggregate also declined from 72.5% in May to 69.2% in June.

These increases reflected direct election spending via the Comelec, indirect spending via LGUs, as well as infrastructure and defense allotments.

IV. 6-Months Debt Servicing Costs Hit Another All-Time High!

The thing is, the media has omitted a very critical factor: interest payments. On the other hand, the Bureau of Treasury glossed over the discussion of overall debt servicing costs.

Figure 4

Though interest payments increased by only 5.22% in June, down from 47.8% last May due to base effects, their share of the total rose slightly from 10.97% to 11.01%. (Figure 4, topmost image)

However, total debt servicing in the first semester of 2024 vaulted by 41.3% YoY. It hit an UNPRECEDENTED high of Php 1.283 trillion compared to its semestral predecessors and is down by only 20% relative to last year's annual or the 2023 data. (Figure 4, middle and lowest charts)

Again, compared to 2023, the gap has been closing dramatically: June amortization was only 7.16% lower, and interest payments were down by 39.96%.

Figure 5

Importantly, since 2019, authorities have minimized foreign debt servicing, but this trend appears to have reversed in 2024. (Figure 5, topmost diagram)

Nevertheless, it is incredible to see the media put a spin on the lower monthly external debt-servicing ratio (at the end of April) as 'good news' while ignoring the fact that the external debt-service burden spiked in 2023.  The recent decline likely represents a hiatus. (Figure 5, middle window)

Most of all, the surge in the external debt servicing burden has pulled down the GIR-to-debt service ratio, implying reduced liquidity for debt servicing and other domestic FX requirements. (Figure 5, lowest graph)

And one shouldn’t forget that the Philippine GIR also consists of external debt and derivatives or "borrowed reserves."

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts

Statistics are about the past. They signify historical data predicated on a limited set of assumptions and barely evince or explain the complex causal relationships that led to these captured outcomes.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden.

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt.

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance.

Figure 6

Yet, the current spending dynamics also imply that the Bureau of Treasury’s declining cash position in the face of higher deficits translates to a coming reversal in the recent downdraft in the BoTr’s financing (borrowing), which ironically has been celebrated recently by some quarters. (Figure 6, topmost visual)

Above all, such transfers should worsen the strain on public savings and diminish the amount available for investments.  Rising deficits have coincided with slower growth of bank deposit liabilities. (Figure 6, middle chart)

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus."

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion

With insufficient taxes and borrowings, the government would have to produce more currency to fund it: this translates to higher inflation ahead.

While the government is yet to publish June’s debt burden—slated for next week—banks and other financial institutions have been a primary source of financing for the public debt-financed record deficit and the conduit of unparalleled financial liquidity. (Figure 6, lowest graph)

Banks and financial institutions will be loaded with increasingly riskier government debt.

Figure 7

Furthermore, the BSP’s net claim on the central government (NCoCG), which has shadowed the uptrend in public spending, has fed into the CPI. It will continue to do so. (Figure 7, topmost and middle graphs)

In conclusion, the mounting imbalances from the trickle-down policies manifested by the historic savings-investment gap, supported by an ever-growing dependence on fiscal deficits and asset bubbles to bloat the GDP, translate not only to higher demand for the USD-Philippine peso (USDPHP) but also signify signs of rising systemic risks. (Figure 7, lowest chart)

Inflationary government policies, rather than symptoms like trade deficits and real FX rates, are the root cause of the weak peso. The BSP's interventions may delay or defer its effects, but ultimately, they cannot forestall the inevitable.

Good luck to those who see this as a free lunch for the economy and "bullish" for financial investments.

____

References:

Murray N. Rothbard, Ten Great Economic Myths, September 9, 2023, Mises.org 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30,2024

 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability—John Kenneth Galbraith 

In this issue

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?

II. The History of BBM's Pre-SONA PSEi 30 Pumps 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry 

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth 

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects 

As the Philippine President is about to deliver his third SONA, the PSEi 30 has surged for a fourth straight week to 6,800. What makes these gains artificial? 

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging? 

The Philippine PSEi 30 closed the week ending July 19th just shy of the 6,800 level. 

Philstar.com, July 20: The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares. The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares… a stronger peso and optimistic economic prospects buoyed local market sentiment… also anticipating the second quarter corporate earnings results. 

In addition to the above, 'strong net foreign buying' contributed to this outperformance. 

Previously, a more prominent explanation had been expectations of rate cuts by the Fed and potential monetary easing by the BSP. 

Financial market news coverage has been mechanically influenced by current events—specifically, the 'availability bias' described in post hoc narratives: because of this event, therefore that. As a result, recent events receive disproportionate attribution and focus. 

However, there seems to be a crucial event missing from this coverage: the political leadership is slated to deliver the annual State of the Nation Address (SONA) on July 22nd, Monday. 

Figure 1 

With a 2.16% advance this week, the PSEi 30 has enjoyed its fourth consecutive weekly winning streak. This weekly gain has propelled the Philippine benchmark to be the second-best performer among its regional peers, following Mongolia’s MSE. (Figure 1, topmost image) 

Remarkably, the PSEi outperformed amidst a prevailing downturn in the Asian market, where 12 out of the 19 national benchmarks closed lower by an average of 0.53%. 

Furthermore, the increased risk appetite for Philippine assets was also reflected in the Philippine peso, which was the only Asian currency to advance this week amidst a strong USD. (Figure 1, middle graph) 

The US dollar index $DXY grew by 0.27% WoW, but eight of the nine regional currencies, excluding Japan, closed lower. 

The USD-Philippine peso $USDPHP retraced by 0.08%, from last July 12’s quote of Php 58.38 to Php 58.335. 

While the yield of the Philippine 10-year bond dived a week earlier, paving the way for its outperformance in the region, it remained unchanged this week as most of the regional peers experienced declines. (Figure 1, lowest diagram)

Figure 2

In contrast, Emerging Asia’s 5-year credit default swap (CDS) exhibited a 520-basis points spike in Philippine CDS (ADB data), indicating that while it comes from a low base, a sustained regional risk-off sentiment could reverse any recent gains. China’s CDS soared by 930 bps. (Figure 2, topmost and middle charts) 

How do the causalities cited by the local media fit into this context? 

The strengthening dollar, falling bond yields, declining stocks, and rising CDS are likely symptoms of de-risking and deleveraging in the face of slowing economies and potential rate cuts. 

Are Philippine stocks and the peso suggesting immunity to this emerging phenomenon? 

II. The History of BBM's Pre-SONA PSEi 30 Pumps

Here is the most important thing the echo chamber has critically missed: 

Since the inauguration of the incumbent President in 2022, the PSEi 30 has enjoyed a series of pre-State of the Nation Address (SONA) pumps. 

The incumbent's previous SONAs were on July 25, 2022, and July 24, 2023. 

From the 6,065.23 trough on June 23, 2022, the PSEi 30 soared to a peak of 6,863.86 on August 19 of the same year, delivering a 13.17% return. (Figure 2, lowest graph) 

The PSEi 30 then surrendered all of those gains and more but found a second post-election honeymoon in October, alongside the UK’s Bank of England (BoE) rescue of its emerging pension crisis, which saw global stocks bottom and reverse to the upside. 

The second SONA pump began on July 7, 2023. It emerged from an interim low of 6,379.03 to reach an interim high of 6,679.13 on July 26, 2023, resulting in a 4.7% return. 

In both instances, the PSEi 30 surrendered all its fleeting gains in no time. 

The third SONA pump came at the temporary bottom of 6,158.48 on June 21, 2024, following the Ayungin Shoal incident. Through July 19th or at 6,791.69, the PSEi 30 has returned by 10.3%. 

How will this time be different compared to its recent predecessors? 

Nota Bene: The SONA pumping cycle doesn’t necessarily end on its actual date, as factors such as momentum and domestic and local liquidity flows may determine its lifespan. 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities 

Why is it an index pump?

Figure 3

This week's 2.16% gain represents the largest week-before-SONA returns. (Figure 3, topmost chart). The difference between the present and previous environments doesn't provide a relevant comparison or suitable probabilities for making a forecast. For instance, the political-economic landscape of 2009 and 2010 was influenced by the climax of the Great Financial Crisis. 

This week’s gains were once again concentrated on the (free float) market cap heavyweights. 

While it may be true that 20 of the 30 member issues were up this week, the outsized gains of the top 10 issues, which carried an astounding 72% share of the PSEi 30 (as of July 19th), delivered the gist of this week’s 2.16%. (Figure 3, middle graph) 

On average (equal-weighted price change), the weekly return was only .92%. 

The substantial difference between the average and the change in the headline index was principally due to the free float weights. 

And this week’s activities resonated with the last four-week performance. 

Fundamentally, while the PSEi 30 was up 10.3% from June 21st to July 19th, the accrued gains were largely derived from the top 5. 

Again, while 22 of the 30 member issues rose during this period, the average gain was 5.48% indicating the spread caused by distortions of the free float market cap relative to the equal-weighted price change. (Figure 3, lowest visual) 

Moreover, the top 5 issues, which expanded by an average of 15.4%, accounted for most of the 5.5% four-week average growth. 

Figure 4

In addition, the 51.17% pie of the top 5 heavyweights have drifted close to their recent milestone levels, with the index pumps rotating among the heavyweights. (Figure 4, topmost graph)

That is, shifting or rotational pumps from ICTSI to the financial 3 to the other market cap heavies—which presently includes the real estate members! (Figure 4, middle and lowest windows)

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

Figure 5

Aside from the incredible pre-closing pumps and dumps contributing to the headline returns, the 2024 version of SONA pumps has emerged against the backdrop of a DETERIORATING mainboard volume! (Figure 5, topmost graph)

As an aside, we omitted posting recent charts of pre-closing massive pumps and dumps to conserve space.

At least there was some volume surge in previous SONA pumps, which is certainly lacking today. And incredibly, little is known about how cross-trades have padded such low-volume pumps.

However, it has not just been the PSEi 30 market cap weightings; the lean trading volume has also been concentrated among the heavyweights.

For instance, the Sy Group's share of the main board volume has been rising in support of the pumps to its shares. (Figure 5, middle pane)

Additionally, the volume share of the top 20 traded issues accounted for 83.6% over the 4-week period, slightly higher than the 83.1% year-to-date. This means that less than 20% of the volume has been dispersed among the other 264 listed companies. Duh!

The PSE noted that there are 284 listed firms as of the second quarter. 

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry

More to this point:

Although the overwhelmingly dominant share of the top 10 brokers decreased from 59.16% YTD to 57% in the four-week SONA pump, the number of total active participating brokers fell to its lowest level (since I began plotting it). (Figure 5, lowest image)

This means that while transactional volume has spread to a wider scope of brokers, which is good news, the plunge in the active share of participants implies that current conditions have squeezed the marginal brokers, which is bad news.

The PSE also noted that there are a total of 122 active brokers in their Second Quarter Report. 

Could this be confirmation of our prediction that a large segment of marginal brokers will become extinct soon?

And the above data reveals the extent of concentration of trading volumes and trading participants to an elite cabal, who are likely managing the PSEi 30 levels.

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth

Figure 6

Naturally, the insufficiency in volume and market depth translates to the underperformance of market breadth.

While this week's market internals showed advancing issues marginally higher by 53 against declining issues, from the June 21st low to the present (SONA pump 2024), decliners remained ahead of advancers 1,924 to 1,888, a spread of 36 in favor of decliners.

This means that the headline performance has starkly diverged from the PSE universe. Incredible.

Another likely indicator of general market sentiment is the participation level of traded issues.

Unlike in the prior SONAs where the number of traded issues saw slight increases, we have been witnessing the opposite in the present conditions—a contraction!

The decreasing rate of average daily traded issues accentuates the ongoing liquidity squeeze at the PSE.

Other measures, such as the average daily number of trades and the average daily volume per trade, exhibit the same worsening liquidity drought.

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

Yet, for prudent investors, here are some critical points to ponder:

-How can this be a bullish sign when the 10% increase in the Index has been accompanied by a drought in volume supported by stagnant participation and decaying breadth?

-Why would the increasing concentration of the index, trading, and market activities not signify an INCREASING risk to financial stability?

-How could the ARTIFICIAL embellishment of the index signify a bullish sign?

Lastly, why and how would these orchestrated campaigns to impose price distortions not magnify increasing imbalances and malinvestments in the PSE, the local capital markets, and the economy?

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

What is the source of financing for the SONA pump?

In essence, savings or credit are the sources of investments (real or financial).

Under the classical gold standard, credit represents the savings of another individual, intermediated by depository institutions.

Under the current fiat money, the US dollar standard, credit can account for "money from thin air."

How has the PSE's low volume signified a sign of increased savings? Or has institutional money been tapping credit for the SONA pump?

Or has the PSEi 30 been reliant on foreign savings and leverage (carry trades)?

PSE data provides some clues:

True, aggregate foreign money flows surged to PHP 2.8 billion this week, the largest since May 17, 2024. 

However, the degree of flow has failed to boost the PSEi 30 during the SONA pump in 2023 and may represent a temporary dynamic today.

As it stands, in the world of global financialization, foreign money flows may account for fund flows by affiliates or subsidiaries of PSE-listed firms registered abroad and offshore firms of allies and colleagues, rather than from money managers in search of higher returns.

These fund flows may be used to artificially inflate statistics to show increased interest by foreigners "to paint the tape."

In any case, while foreign flows cushioned the ongoing decline in trading volume this week, these inflows accounted for a mere PHP 93.6 million from the June 21st trough. 

The spike in this week's flows reveals that foreign flows have largely been absent in the previous three weeks, and it is likely that the 2024 SONA pump has been engineered by domestic financial institutions. 

Our guess: Could this partly be the handiwork of the Maharlika Sovereign Wealth Fund and other government financial institutions? 

More importantly, despite foreign flows, trading volume remains in the doldrums, exposing only the deficiency in savings. 

Yes, the Philippine Statistics Authority declared an increase in gross savings in 2023. However, the broader picture tells us a different story: a marginal rebound following a collapse. 

Yet, questionably, this savings data is determined by GDP! 

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

There are clues pointing to this possibility. 

The SONA pumps may involve Other Financial Corporations (OFCs). 

For instance, according to BSP data covering Q3 2023: "Based on preliminary results of the Other Financial Corporations Survey, the domestic claims of the other financial corporations grew by 2.4 percent in Q3 2023… the other financial corporations’ claims on the other sectors, particularly the private sector, grew as the sector extended more loans to households and increased its holdings of equity shares in other nonfinancial corporations" (bold added)

Figure 7 

Claims on the private sector surged at the end of Q2 2023 going into Q3 2023. (Figure 7, topmost graph) 

Did flows from the OFCs account for the SONA 2023 pump? 

What about in 2022? 

While the Q3 2022 data was silent on claims on the private sector, the reversal from outflows in Q2 2022 could have been indirectly responsible for the June to August 2022 SONA pump, which delivered a 13% gain. 

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion

Furthermore, signs of accelerating liquidity growth could extrapolate to money diffusion into the PSEi 30, channeled through orchestrated or engineered asset pumps. 

May's fourth largest public spending, possibly representing an early-stage distribution of liquidity from the pre-Election "Marcos-nomics stimulus," may also have been used by banks and non-bank financial institutions for the 2024 SONA pump. 

This has a precedent. 

An uptrend in the growth of cash in circulation financed the previous national (Presidential) elections, which percolated into the pumps of SONA 2022 and the 2022 post-election stock market honeymoon. 

Another factor was the spillover from the historic PHP 2.3 trillion liquidity injections in 2020-2021 by the BSP to rescue the banking system—which was sold to the public as benefiting the economy. 

An uptick in the growth of cash in circulation from April to October 2023 also supported the 2023 SONA and the Q4 2023 rally in the PSEi 30. 

How does this apply to the present? 

May 2024's cash in circulation growth of 6.1% represents the highest level since December 2022, which fund flows have likely spurred this SONA 2024 pump. (Figure 7, middle image) 

It is unsurprising that a substantial part of liquidity growth has been partly funded by bank credit expansion. 

Universal Commercial Bank lending growth, which may have been used to finance pre-election spending in 2021-2022, has been manifested in the pumps of SONA 2022 and the post-election honeymoon. And its reduced growth may have depressed the returns of the SONA 2023 pump. (Figure 7, lowest chart) 

Finally, the accelerating UC bank lending growth from Q4 2023 to the present has been instrumental in financing the 2024 SONA pump. 

As previously explained, though disinflation could prevail in the interim due to the slowing real economy, supported by the rise in non-performing loans (NPLs), which may constrain the uptrend in bank lending, sustained increases in deficit spending should put a floor on inflation. 

A resurgence of inflation, which should cap interest rate cuts, will further expose imbalances and malinvestments resulting from all these orchestrated attempts to create an artificial economic and financial boom through credit expansion, price manipulation, and statistical artifices. 

Although the political leadership did not explicitly mention the stock market to boost his political capital during the previous SONAs, the message—implying "strong earnings growth ", "optimistic economic prospects", a "stronger peso," and so on—represents the commonplace conveyance by institutional mouthpieces in explaining the recent spike in the PSEi 30. 

However, when everything goes off the rails, it has to be either the US Federal Reserve or something foreign, but hardly ever local affairs (attribution bias). 

QED.  

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance— Taylor Caldwell, (often misattributed to Marcus Tullius Cicero) 

In this issue

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth  

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

II. What a Bullish Flattener Implies

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth  

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

The collapse in the yields of the Philippine Treasury Markets highlights the BSP's upcoming rate cuts, which, along with May's spending and liquidity growth spike, represents the "Marcos-nomics stimulus."

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

Last week, significant developments in the Philippine treasury markets went largely unreported by the media and the echo chamber. Despite this, the implications of these changes are significant for the country's economy.

Figure 1

One. T-bill rates remained steady, while yields on Philippine notes and bonds plunged, deepening the "bullish flattening" process that we have been pointing out. (Figure 1, topmost window)

Two.  The entire Philippine treasury curve has traded below the Bangko Sentral ng Pilipinas' (BSP) overnight reverse repurchase rate (ON-RRP). (Figure 1, middle image) 

Figure 2

Three.  The steep drop in 10-year Philippine treasury notes last week was the most pronounced in the (ASEAN) region, even surpassing the recent declines seen in US Treasury counterparts. (Figure 1, lowest diagram, Figure 2, upper graph)

In essence, treasury traders have reinforced indications that the BSP is preparing to lower rates.

You heard this first here.

II. What a Bullish Flattener Implies

Yet, a bullish flattener can be seen as a sign of different things depending on the context.

In the BSP’s latest Financial Stability Report (FSR), a bullish flattening curve represents "Longer-term outlook is improving and investors price-in lower rates. This gives the central bank room to lower the policy rate" (BSP, 2023)

For Wellspring Financial Advisors, "We have historically seen bull flattening leading into a recession. This can often happen because of a flight to safety trade and/or a lowering of inflation expectations " (Bruss, 2023)

Last we noted that "T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts" (Prudent Investor, 2024)

The point is, while not a direct indicator of economic conditions or inflation, the treasury yield curve provides a crucial insight depending on prevailing economic and financial circumstances.

Nonetheless, the following factors may be relevant to the present conditions:

First, the fact that rates have been tumbling translates to the treasury markets expecting an easing of monetary policy. Rate cuts can only be justified by diminishing inflation rates.

Second, lower inflation expectations increase the demand for longer-term securities. (ceteris paribus)

Third, it could also signify slowing economic growth or increasing risk aversion (even flight to safety).

Fourth, it may imply accruing imbalances in the supply and demand for Philippine treasuries.

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

How will this affect the banking system?

One. The illusion of debt-financed spending utopia.

While lower rates could boost the GDP in the immediate term through increased credit expansion, allowing for expanded financing of Keynesian desired spending, this is contingent upon the capacity of balance sheets to absorb higher leverage.

For instance, unlike in 2008-2017, the serial BSP rate cuts in pre-pandemic 2019 haven’t exactly bolstered bank lending, which in contrast, declined due to the scourge of hidden NPLs. (Figure 2, lower pane)

Only the BSP’s historic Php 2.3 trillion liquidity injections backed by the unprecedented relief measures reversed it in 2021.  

Powered mostly by consumer loans, universal commercial bank lending soared by 10.2% in May 2024—the strongest growth since March 2023.

Much of the current strength in bank lending is due to 'refinancing' or debt 'rollovers,' which is why the Consumer Price Index (CPI) remains subdued.

Ironically, the establishment brands this debt expansion as 'restrictive.' Incredible.

In the absence of this vigorous credit expansion, think of what would happen to inflation and GDP.

The thing is, spending will be determined by balance sheet conditions over time, rather than just rates alone.

Two. A temporary boost on investments.

With surging fixed-income prices, it may also boost the banking industry’s investment side of the balance sheets.

Figure 3

It may also temporarily lower the industry’s camouflaged mark-to-market losses in the context of held-to-maturity (HTM) assets. (Figure 3, topmost chart)

However, HTMs showed minimal improvement when 10-year yields plummeted in 2022-2023, confirming the trend observed from 2019 to 2022, where a crash in rates resulted in negligible progress for the bank’s HTM assets.

Three. An adverse impact on the bank’s interest margins.

Furthermore, the narrowing bond spreads should also lead to tighter interest margins for banks as the 2019-2020 experience showed, which means lesser incentive to lend. (Figure 3, middle graph)

Lastly, falling rates expose disguised credit risks.

During 2019-2020, the BSP rate cuts were in response to mounting pressures from credit delinquencies in the banking system. While the pandemic recession exacerbated the situation, BSP's comprehensive measures—combining rate cuts, liquidity injections, and various relief efforts—masked the true extent of NPLs. (Figure 3, lowest pane)

Despite some of these relief measures and subsidies in place, the recent resurgence of NPLs have been pressuring the BSP to consider such rate cuts.

Figure 4

In short, the BSP rate cuts would whet the speculative appetite of banks and financial institutions for "investments," while reducing their core "lending" operations (similar to the rate cuts of 2019-2020) (Figure 4, topmost image)

Most importantly, higher interest rates have exacerbated the servicing costs associated with record-high levels of public debt, indicating a potential reduction in GDP growth driven by lower public spending over time.

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

Despite its ever-shifting or ambivalent stance, the BSP has been advocating for lower rates. Several economic data released last week help explain this push.

Firstly, despite the recent record-high employment rates, labor markets continue to face challenges.

While the unemployment rate rose from 4% in April to 4.1% in May, this increase was primarily due to a rise in the labor force participation rate. The employed population actually increased by 510,000 month-over-month (MoM), but a larger increase in the labor force by 576,000 led to an uptick in the unemployment rate. (Figure 4, middle visual)

However, a broader analysis reveals emerging tensions in labor participation rates. 

It seems odd to see a job boost in the investment-starved agricultural sector reportedly suffering substantial losses from El Nino. Yet, the government bannered Php 9.6 billion in investment gains this month (mostly from the elites). 

Furthermore, the government was the largest contributor to job gains. Aside from construction jobs stemming partly from government infrastructure projects (including PPPs), the government and defense sectors saw significant gains in both May and March. (Figure 4, lowest chart) 

Even assuming its accuracy, this data provides clues as to why consumers have been struggling, contradicting the headline trend of "full employment." 

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales 

Next, external trade retraced much of its April advances in May.

Figure 5

Import growth fell from a 13.01% increase in April to a negative 0.03% in May, primarily due to an 11.5% plunge in capital goods imports, while consumer goods imports only rose by a meager 0.42%. Capital and consumer goods accounted for 25.6% and 19.6% of the total share, respectively. (Figure 5, topmost pane)

Export growth also dived from a 27.9% growth spike in April to a 3.08% contraction in May. 

While Artificial Intelligence (AI) has boosted global semiconductor trade, with exports increasing by 19.3% year-over-year (YoY) and 4.1% month-over-month (MoM) in May, Philippine semiconductor exports saw an incredible collapse from a 30.7% YoY growth spike in April to a 13.3% contraction in the same month! Microchip exports accounted for 43.4% of the total share. (Figure 5, middle graph) 

Thirdly, despite periodic junkets by the leadership, which reportedly led to significant investment pledges from key geopolitical partners like the US and NATO, April's Foreign Direct Investments (FDI) fell by 36.9%, but overall YTD growth was up still 18.7%. Debt made up significant proportions of both April's and YTD FDIs: 73.2% and 63.5%, respectively. What happened to these investment promises? (Figure 5, lowest chart) 

Also, debt-driven FDI flows do not automatically translate into 'investments' and could serve other purposes. Some might declare it as such to the government to avail of incentives. 

Lastly, FDI flows exhibit a downtrend.

Figure 6

Finally, domestic manufacturing remains stagnant, with production values and volumes increasing by 2.2% and 3.2% respectively in May (YTD: -0.1% and +0.9%). However, these gains may be offset by declining sales values and volumes, which saw decreases of -1.5% and -0.3% in May (YTD: -1.4% and -0.3%). (Figure 6, topmost graph) 

Imports have partially filled the slack in domestic production, which is the essence of the trade deficit. 

Overall, weak imports and a manufacturing stupor manifest a fragile domestic demand. 

In a nutshell, despite optimistic projections by the echo chamber, even government data suggests a critical shortage of investments and an increasing dependence on debt supporting the real (not statistical) economy.  

Moreover, deepening dependence on the government to stimulate GDP growth, evidenced by near-record "twin deficits," could lead to heightened inflation, higher future taxes, and magnified reliance on external debt. (Figure 6, middle chart)

It is not helpful when the establishment confuses the GDP with the overall economy, for the simple reason that the GDP has been skewed to reflect the growth of the government and the elites—the "trickle-down syndrome." 

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth

Could the public spending spike observed in May 2024 signify a potential precursor to a "Marcos-nomics stimulus" program? 

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May. 

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

May 2024 marked the fourth highest spending on record, which significantly boosted the BSP’s principal measure of liquidity, M3, to 6.5%, a six-month high.

Figure 7

A substantial portion of this liquidity growth stemmed from cash in circulation, which surged to its second-highest level on record, surpassing the zenith of December 2022. (Figure 7, topmost image) 

Traditionally, December has been the peak for M3 annually. However, this time could be different. If May’s spending trend continues, nominal cash levels may surpass the historic highs of December 2023 even before year-end! 

May’s cash growth rate of 6.1% YoY was the highest since December 2022’s 7.6%. 

For want of doubt, the administration has begun injecting large amounts of cash into the financial system. 

Together with the accelerating growth in the banking system’s loans, the BSP’s net claims on the central government (NCoCG) surged by 89.21% in May, while the bank's NCoCG slowed to 12.2%. (Figure 7, middle graph) 

This combined financing of government deficit spending and private sector borrowing or formal credit expanded by 9.44% to a record Php 27.02 trillion in May! 

And yet, all we can hear from the consensus is that this represents a “restrictive environment!” 

The thing is, if May’s deficit spending-driven liquidity growth will be sustained, it should put a floor on the present private sector-powered disinflationary impulses—with a time lag. 

The Philippine treasury markets have signaled that the BSP may be about to confirm the unannounced "Marcos-nomics stimulus" with upcoming rate cuts. 

However, such stimulus could also reinvigorate the third wave of the incumbent inflation cycle. (Figure 7, lowest chart) 

Stay tuned.

___ 

References

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT December 2023, p.35 bsp.gov.ph

Kevin Bruss Steepening and Flattening of the Yield Curve, Wellspring Financial Advisors, August 10, 2023; wellspringadvisorsllc.com

Prudent Investor, June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'? July 7, 2024

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? Substack.com June 30, 2024