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

  

The global government finance Bubble dwarfs all previous Bubbles. Insatiable demand for perceived safe government debt and central bank Credit has allowed this Bubble to inflate for more than 15 years. Years of massive deficit spending ensure deeply systemic economic maladjustment. Endemic deficit spending has inflated incomes and corporate profits, in the process working to inflate historic securities, housing and other asset market Bubbles—Doug Noland

In this issue:

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

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

VI. Debunking The Overton Window’s "Supply Side" Inflation

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

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

The changes in VAT reporting resulted in the narrowing of the Philippine government's budget deficit in July. "Marcos-nomics" remains in action as the government spending binge persists. Authorities raised USD 2.5 billion—what are the possible implications? 

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly 

The establishment media, which self-righteously pontificate on the war against disinformation and misinformation, tell us that July's "narrowed" deficit was implicitly a function of either a vigorous economy, "sound" management policies of the government, or even both. 

Although some reports mention the rescheduling of VAT payments from monthly to quarterly as a factor that caused the ballooning revenues leading to such distortions, this aspect remains mostly untouched. 

Here’s the Bureau of Treasury: The YoY growth was due to higher collections of Value Added Tax (VAT), income taxes, other domestic taxes, and percentage taxes. The growth in VAT collection was partly attributed to base effects as collections last year were lower by around two months' worth of VAT collection with the shift from monthly to quarterly filing of VAT payments as mandated by the Tax Reform for Acceleration and Inclusion (TRAIN) Law. (bold added) 

A top accounting firm explained (bold italics original, bold mine): 

One of the notable changes that will be implemented this year is the removal of the monthly filing of Value-Added Tax (VAT) returns. Section 37 of the TRAIN Law, amending provisions of Section 114(A) of the Tax Code of 1997, as amended, and as implemented under Section 4-114-1(A) of Revenue Regulations (RR) No. 13-2018, states that “beginning January 1, 2023, the filing and payment required under this subsection shall be done within twenty-five (25) days following the close of each taxable quarter”. Thus, VAT-registered taxpayers are no longer required to file the Monthly VAT Declaration (BIR Form No. 2550M) for transactions starting January 1, 2023. Instead, they will file the corresponding Quarterly VAT Return (BIR Form No. 2550Q) within twenty-five (25) days following the close of each taxable quarter. (Grant Thornton, 2023)

Figure 1

So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter. 

Since 2023, revenue spikes have led to budget surpluses in four of the seven—close of the taxable quarters of January, April, July, and October—while the remaining three quarters reported deficits of less than Php 50 billion. (Figure 1, topmost window) 

Therefore, it is reasonable to predict that deficits will swell in August and September, while easing again in October 2024. 

Additionally, because of the distortions from quarterly reporting, revenue statistics should be viewed and interpreted on an end-of-quarter basis. 

Nonetheless, irrespective of how the media depicts and interprets it, July’s public expenditures represent the sixth highest non-seasonal (ex-December) spending and the eleventh highest including the seasonal spikes of December. (Figure 1, middle image) 

Public spending over the seven-month period surged by 13.2% to a record Php 3.3 trillion, even as revenues spiked by 28% to an all-time high of Php 2.61 trillion. This resulted in a Php 642.8 billion deficit, which is 7.2% higher than in 2023.

The surge in July spending signifies a validation of our prognosis regarding the unannounced "Marcos-nomics stimulus," which has been further confirmed by the August BSP rate cut. (Prudent Investor, 2024)

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

Although authorities reported a (-6.34% YoY) slowing of July financing while its cash reserves (-21.54% YoY) fell further, the explosion of Marcos-nomics stimulus spending is bound to reverse this. (Figure 1, lowest graph)

Mainstream experts, who focus on a single statistic while ignoring the bigger picture and (political) path dependency, are likely to misread, misinterpret, and draw brazenly erroneous conclusions.

For instance, the DOF chief tells us that "the country's rising debt is not a cause for worry."

Figure 2

But the thing is, July's interest payments alone hit an all-time high as public debt reached a record Php 15.5 trillion last June.  The 7-month share of interest payment-to-total expenditures has risen to its highest level since 2009! (Figure 2, top and middle charts)  

Authorities will publish July's debt standing next week.

And it doesn’t stop there.

For the first seven months of 2024, the aggregate debt servicing reached a milestone high in peso levels with a 40.6% YoY growth spike. This increase was driven by 44.9% and 32% growth spikes in amortization and interest payments, respectively. (Figure 2, lowest diagram) 

Figure 3

As a consequence, because July's amortization and interest payments were 7% and 27% below their comparative levels last year, this year's total debt servicing accounted for 15% below last year—with 5 months to go! (Figure 3, topmost image) 

It is no coincidence that the government raised USD 2.5 billion last week, on top of the USD 2 billion last May, which authorities partially used to prop up its Gross International Reserves (GIR).

Bloomberg/Yahoo Finance, August 29, 2024: The Philippines priced $2.5 billion of dollar bonds, its second such offering this year and the largest of a flurry of deals Wednesday in Asia before a likely Federal Reserve interest rate cut…The Philippines raised $2 billion in a May dollar bond deal that Finance Secretary Ralph Recto said at the time was part of its plan to generate about $5 billion in funding from overseas markets this year. The new offering was the largest of five note sales in the US currency on Wednesday, the most Asian issuers in six weeks, according to data compiled by Bloomberg based on deals with a minimum size of $100 million

The Philippine government also secured a $500-million climate financing support from the Asian Development Bank (ADB) under its Climate Change Action Program Subprogram 2—a climate change policy-based loan. 

Regardless of whether debt is politically labeled as green (climate or sustainable) or not, it is still debt that must be repaid. Political colors don’t change the functionality of credit. 

The recent spate of external borrowings is likely to push total external debt—which was already at a historic level in Q1 2024—to even greater heights! (Figure 3, middle pane) 

Given these factors, why would the government continue raising external (and local) debt if deficit spending were under control? 

And how would such political path dependency assure us that the relentless rise in public debt (as part of systemic leverage) is 'not a cause for worry'? 

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State 

So, what did the government spend on last July? 

Except for net lending and subsidies, government expenditures grew for Local Government Unit (LGU) allocations (12.2% YoY), interest payments (25%), equity (608%), and national government disbursements (9.44%).

Net lending represents the net advances by the National Government for the servicing of government-guaranteed corporate debt.

Meanwhile, equity refers to the National Government’s investments in the authorized stock of Government-Owned and Controlled Corporations (GOCC).

The three largest segments of public spending in terms of distribution were interest payments (16.3%), LGU allocations (17.7%), and National Government disbursements (63.1%).

While NG disbursement was lower in peso terms, as we have been pointing out, LGU spending—which likely represents funding for the forthcoming 2025 national elections—has been picking up steam.

 Figure 4 

From a seven-month perspective, NG disbursements in pesos reached an all-time high, as the growth rate nearly doubled from 6.4% in 2023 to 12.9% in 2024. (Figure 4, middle graph) 

Meanwhile, LGU outlays have played catch-up, with a growth spike from 2.7% in 2023 to 13.2% in 2024, reaching the second-highest level. (Figure 4, topmost chart) 

Aside from other programs, the authorities plan to acquire 40 multi-role fighters to supposedly boost the nation’s defense.

According to Interakyson/Reuters: "President Ferdinand Marcos Jr has approved “Re-Horizon 3”, an acquisition plan for new military weaponry and equipment worth 1.89 trillion pesos ($33.64 billion) to boost defenses."

The Marcos-nomics stimulus has been directed at pre-elections, the transition to a war economy and infrastructure, as well as the administrative/bureaucratic state. For example, there are over 200,000 vacancies in government jobs.

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

On the other hand, the boost in LGU allotments has also manifested through a three-month growth surge in cash in circulation, which increased from 6.1% in May to 6.9% in June and 8.1% in July. (Figure 4, lowest visual)

The peso level of cash in circulation reached its fourth-highest level last July (including the seasonal peak in December).

The upside bump in liquidity translates to a relative increase in demand—where LGUs spend—and percolates into the national level.

The spillover effect of the stimulus is further amplified by the spending boost from the National Government.

Such expenditures, once again, benefit the recipients of credit-financed public spending first, creating ripples across the political economy through various stages, primarily affecting entities connected with the government before reaching the general economy.

This swelling of government expenditures via resource consumption crowds out or limits its availability to the private sector—a phenomenon known as the "crowding out effect."

Figure 5

As a result, the surge in public revenues reflects the initial reactions to the intensified public expenditures. Bank lending and inflation also help support public revenues.  (Figure 5, top and middle windows)

The distortive effects—boosting aggregate demand without a proportional increase in production—exert pressure on the overall price level.

The intensifying mismatch between demand and supply (limited by the crowding-out syndrome) likewise translates to increased pressure for higher imports, magnifying the "twin deficits," which explains part of the USD 5 billion overseas issuance. (Figure 5, lowest chart)

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

Furthermore, as the biggest borrowers, the government will increasingly draw from the public’s dwindling savings, competing with the massive credit requirements of San Miguel, the PSE’s non-financials, unlisted non-financials, banks, the financial industry, and households.

The crowding out effect, also evidenced by the record widening of the saving-investment gap, further explains the acceleration in external borrowings.

Of course, due to decaying productivity and the deepening drawdown in savings, households have intensified their reliance on credit to sustain their lifestyles. This dynamic is demonstrated by the structural shift in Philippine bank lending toward consumer loans, coming at the expense of producers.

Figure 6 

Part of this drawdown in savings is exhibited by slowing deposit growth. (Figure 6, topmost graph) 

Last July, universal-commercial bank supply-side loans increased by 8.8%, while consumer loans grew at a slower rate of 24.3%. (Figure 6, middle image) 

However, the gap between the share of consumer loans and production loans reached an all-time high. (Figure 6, lowest chart) 

Yet, the supply-side loan growth was primarily driven by a 438% spike in borrowing by the professional, scientific, and technical sector—a majority of which is constituted by activities of head offices. Bank lending would have been stifled were it not for this development.

Figure 7

Such are the reasons behind the intertwined trajectories of public expenditures and the Consumer Price Index (CPI). The causal relationship is reflected by the accelerating trend of public spending fueling the nation's inflation cycle. (Figure 7, topmost image)

VI. Debunking The Overton Window’s "Supply Side" Inflation

Have you ever heard the media and their favorite establishment experts talk about how demand, driven by government policies, is the primary source of inflation? 

Of course, not.

Like the nasty and deleterious side-effects of the pandemic lockdown and the COVID vaccines as well as the NATO’s proxy war playing out in Ukraine (where establishment media unilaterally demonizes Russia), the BSP-government driven inflation represents a taboo.

There is hardly any balance in mainstream’s reporting or analysis. The government determines the Overton Window—alternative opinions are either censored or suffer from the cancel culture.

Ironically, that inflation is caused by the government is apparent on their reports.

For instance, in the BSP’s July 2024 report on domestic liquidity, "Net claims on the central government expanded by 14.0 percent, up from 12.1 percent partly due to sustained borrowings by the National Government."

Sustained borrowings by the National Government from the banking system. 

But what are net claims on the central government (NCoCG)? 

Again, from the BSP, "Net Claims on CG include domestic securities issued by and loans and advances extended to the CG, net of liabilities to the CG such as deposits" (BSP, 2024)

In essence, banks and financial institutions fund the government’s boondoggles through credit expansion (printing money).

Unfortunately, hardly anyone bothers to explain this phenomenon to the public: except for one instance, the pandemic.

To highlight its rescue efforts, the BSP discussed its historic PHP 2.3 trillion liquidity injections from 2020 to 2022, but a code of silence has surrounded this topic prior to and after.

In contrast, the public has been bombarded or hardwired with the brazen tomfoolery of the "supply side" aspect of inflation. 

This narrative effectively absolves the government of accountability and attributes inflation to "greedflation" or "greedy" entrepreneurs or "market failure."

Yet the fundamental law of economics (demand and supply)—where prices basically coordinate the balance of demand and supply—debunks this popularly held belief.

Aside from the balancing role of prices, supply side disruptions cause RELATIVE inflation on prices and services (directly and indirectly affected). To wit, price increases in several areas will result in DECREASES in others—given the scarcity of the (supply) of the medium of the exchange (Philippine peso).

Or, supply disruptions do not cause a generalized and prolonged loss of purchasing power.

But little of this economic truth seems to matter.

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

This brings us to "Marcos-nomics Stimulus." Because of the Overton Window, the public has limited understanding of public financing, which they believe is an exclusive domain of direct taxation and government borrowing.

Still, neither have authorities told the public that the BSP has yet to scale down its massive holdings of Philippine treasuries (NCoCG) nor the back-to-back All-time highs in the banking system’s NCoCG. (Figure 7, middle and lower charts)

Figure 8

Furthermore, following the PHP 3 trillion spike in 2020-2021 (not PHP 2.3 trillion as declared), the BSP’s asset base of PHP 7.51 trillion (as of February 2024) remains only 6.3% lower than its historic high of PHP 8.013 trillion in October 2021. (Figure 8, topmost chart)

Briefly, the BSP has hardly wound down on its QE as reflected by its near-record share of holdings of domestic treasuries, even as the BSP has replaced some of this with a buildup in FX borrowings. (Figure 8, middle graph) 

Again, this represents another reason for the government’s recent external borrowing.

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. (Figure 8, lowest window) 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble.

____

References

 

Doug Noland, Weekly Commentary: Money Machines, August 31, 2024, CreditBubbleBulletin.blogspot.com

 

P&A Grant Thornton, A closer look at quarterly VAT filing, February 7, 2023, grantthornton.com.ph

 

Prudent Investor, Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness, August 18, 2024

 

Bloomberg, Yahoo Finance, Philippines Sells $2.5 Billion of Dollar Bonds in Asia Deal Rush, August 29, 2024

 

Bangko Sentral ng Pilipinas, Central Bank Survey and Depository Corporations Survey July 2024, bsp.gov.ph