The economic recovery of the Great Recession has been almost imperceptible to most Americans. On a per capita bais, real GDP per Capita grew by 6.71% in the past ten years - or roughly a compounded annual average growth rate of only 0.72% per annum. This is far less than the so-called "Hindu Rate of Growth" threshold of 1.30% per annum. This growth rate is so slow that it is almost imperceptible.
Sometime in 2018, if growth rates continue their current trend, something extraordinary will happen. Those who survived the Great Depression in 1940 (eleven years after the onset of the Great Depression) will be substantially better of than the survivors of the Great Recession in 2018. Real GDP Per Capita for Great Recession survivors would have grown by another anemic 0.72% per annum in 2018. But for survivors of the Great Depression era, their incomes per capita would have grown by an astounding 7.75% in just one year. Moreover, that trend will only accelerate in the next three years. By 1943, Great Depression survivors will be almost 56% richer than they were in 1940.
Can we expect the same for survivors of the Great Recession in the next three years? It's possible but not probable.
Have Philippine
Real Estate and Construction Loans reached a permanently high plateau?
Real Estate and Construction Loans as a percentage of Total Loan
Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of
TLP sometime in 2011. That ratio peaked at 20.55% as of September 2013
but has bottomed out at 18.61% of TLP as of December 2014. This
ratio has climbed back up to 19.40% as of September 2017.
Now, are we up
to the levels of the previous real estate boom? (as in mid 1990s to
1997?) Honestly, we don't know. BSP data only goes as far back as 1999
when the previous real estate bubble had already burst and the financial
system was most likely deleveraging. However, we do know that investment in construction as percentage of GDP is at an all time high of 13.01% as of September 2017, surpassing the previous all time high of 12.10% of GDP in 1990.
This has led to a substantial cumulative overhang in the construction sector. Investment in the construction sector has been way higher than normal, leading to a possible investment hangover sometime down the road.
Have Philippine Real Estate and Construction Loans reached a permanently high plateau? Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011. That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. In 2016, this ratio has climbed back up to 19.65% as of June 2017.
Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know. BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging as evidenced in this chart:
Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990. This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.
As of the 2nd Qtr of 2017, Construction GV as a percentage of GDP now stands higher at 14.31% of GDP - an all-time high for the past 25 years. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 7.2% above equilibrium, a rise of 7.1% in just eighteen months. Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.
In the first half of 2017, the Philippine House Price Index hit a new peak of 232.41. This is 3.09% higher than the previous peak of 225.44 posted in the first quarter of 2017 and 8.05% on a year-on-year basis. From 2004 to the present, the Philippine House Price Index has climbed much faster than inflation. The gap between current house prices and house prices adjusted for inflation stands at its highest ever, 66.52%. Meaning, had house prices merely tracked inflation since 2004, the Philippine House Price Index would now stand at just 165.89 as of the first half of 2017.
Source: Collier's International Philippines, Makati CBD Prices
Sales volumes, as indicated by the HLURB Licenses to Sell Statistics, have shown a dramatic slowdown in the first half of 2017. Annualized Sales Volumes now stand at 171,172 units for the first half of 2017. This is off by 34.20% since year-end 2016. This sales volume now stands at slightly higher than the 170,379 level posted at year-end 2011 and below the 172,967 level posted almost ten years ago at year-end 2007. If sales volumes do not pick up in the second half of 2017, the long-term upward trend in ever increasing sales volumes that has been in place since 2001 would have been broken, indicating a real estate bear market is imminent.
Much has been made in the media of Comelec Chairman Andy Bautista's Php 1 billion in unexplained wealth. Both the mainstream media and the blogosphere have focused on his humongous deposits with Luzon Development Bank (LDB), spread out through as many as 35 different accounts with the same bank. It is understandable for the general public to latch on to Andy's LDB deposits. It's something that the public can easily grasp and relate to. Ordinary citizens have passbooks of their own. Passbooks are also admissible as prima facie evidence of ill-gotten wealth in a court of law.
Little discussion has revolved around the offshore corporate investment vehicles found in Andy's possession by his estranged wife, Patricia Bautista. Not many people are familiar with tax havens. It is a shadowy world inhabited by the extremely rich and the extremely corrupt. Just ask Andy Bautista. He did, after all, spend almost five years in the PCGG going after Marcos wealth hidden in offshore trusts. But it is here that the real wealth may lie.
Why?
Because they are "almost" perfect vehicles for evading taxes and concealing ownership of assets. They are routinely used by gangsters and dictators as well as by spouses seeking to hide wealth from their wives in an impending divorce. Tax havens are secretive, anonymous, and almost downright impenetrable. Half of the world's trade passes through tax havens. Eight percent of the world's wealth resides in tax havens. For developing countries like the Philippines, as much as 20% of the country's wealth resides in tax havens. Tax havens, therefore, are no laughing matter.
Offshore companies are easy to form. Company formation can take as little as three days and can cost as little as US $1,000.00. Companies can be started from scratch or bought off the "shelf" in the form of a dormant ready made company. Bank accounts can be formed in someone else's name, making it almost impossible to trace to the original owner. Company shares of stock can be in the form of bearer shares wherein the name of the owner/holder is not included in a physical stock certificate, concealing the ultimate beneficial owner. For as little as $500.00, company directors/officers can be appointed for you. These very same directors can sign a power of attorney handing control of the company back to you and thus remaining completely ignorant of your company's operations. All this serves to provide a deep level of secrecy that is so effective at hiding wealth, especially ill-gotten wealth.
Secrecy is paramount. Secrecy is often the sole reason that a tax haven exists. The more secretive a tax haven is deemed to be, the more dubious the source of money. The Tax Justice Network, a watchdog group focused on tax havens, has compiled a Financial Secrecy Index that rates the secretiveness of various tax havens. The higher the score on the secrecy index, the more impenetrable and untraceable the money is. The Philippines, for instance, has a secrecy index score of 63. Switzerland, the biggest and most well-known tax haven, scores a high 73.
Andy's Offshore Companies
All three of Andy's offshore companies were formed during Andy's time as PCGG Chairman. Little detail is known about them other than what was declared in Patricia Bautista's affidavit.
The first, called Bauman Enterprises Limited (Bauman), was incorporated in the British Virgin Islands (BVI) on September 29, 2010 - a mere six days after Andy Bautista assumed the office of PCGG Chairman on September 23, 2010. BVI is a well known tax haven. Around 500,000 or 40% of the world's offshore companies are incorporated in BVI. The BVI has a secrecy score of 60, slightly lower than the Philippines. Bauman has a bank account in Singapore, another well-known tax haven. The name Bauman sounds like a contraction of Bautista Management and it is not clear if Andy himself was listed as an incorporator or board member/trustee.
The second vehicle, Mantova International Limited (Mantova), was formed in Brunei Darussalam on April 26, 2011 - a mere seven months after Bauman was born and Andy"s assumption of the PCGG Chairmanship. Brunei is not well known as a tax haven. Instead it is well known for its oil reserves and the riches that oil has brought to its flamboyant King. Brunei's secrecy score is an impenetrable 83, one of the highest in the whole index.
The third vehicle, Mega Achieve Inc., was incorporated in Anguilla, a British Overseas Territory in the Carribbean on July 15, 2014, some three years after the birth of Mantova and towards the waning days of Andy's PCGG Chairmanship. Anguilla's secrecy score is 69, lower than Switzerland's but higher than BVI's.
Company
Location
Date of Incorporation
Bank Account
Secrecy Index
Global Scale Weight
Bauman Enterprises Limited
British Virgin Islands
09/29/10
Bank of Singapore
60
.281
Mantova International Limited
Brunei Darussalam
04/26/11
NA
83
.000
Mega Achieve Inc
Anguilla
07/15/14
NA
69
.002
Could these be "Shelf" Companies?
Did Andy acquire these companies while he was in PCGG or during his current tenure in the Comelec? Again, we don't know. But a scan of ICIJ's Offshore Leaks Database shows many companies with similar names but formed in other tax havens. Most of them are defunct, having been deactivated long before Andy assumed any government post. Here are some of the closest:
Company
Location
Date of Incorporation
Date of Deactivation
Intermediary
Officer
Mantova Co. Inc.
Bahamas
11/06/92
12/31/93
Cititrust (Bahamas) Limited
Bauman Limited
Bahamas
07/16/93
10/31/97
Harry B. Sands Lobosky
Mega Achieve Holdings Limited
Samoa
10/07/13
02/15/15
Markland Secretarial Services Limited
Yang Hanwan/Mossfon Subscribers Ltd
The similarity of names to the ones in Andy's possession is a strong indication that Andy could have purchased the companies "off the shelf" and in ready made form from a well known purveyor of offshore companies such as Mossack Fonseca, a Panamanian law firm that was subject to a massive information leak in 2016. Quite a few world leaders have already been outed as users of offshore companies. The Prime Minister of Iceland was forced to resign when a previously undisclosed offshore company linked to him popped up in this database.
Besieged Comelec Chairman Andy Bautista claimed in an interview with ABS-CBN's Karen Davila (beginning at 21:00 of the above video) that he had been acting as "the designated family treasurer" for his parents and siblings since as late as the 1990s.
“Most of [it] belong[s] to my parents, my brother and my sister,” Bautista told the Inquirer. He was referring to his brother, Martin, and sister, Susan Bautista-Afan. Most of the passbooks were in the name of Bautista and his parents. At least one showed the name of Susan and another was a joint account with Patricia. Martin’s name was not on any of the passbooks in Patricia’s possession.
Bautista said Martin was doing well as a doctor in the United States, while Susan also earned substantially when she lived in United States. Susan, a dual citizen, is now with ABS-CBN Foundation.
In a subsequent interview with GMA News, brother Martin Bautista claimed that he had at least US $1.75 million (around Php 87.5 million) with his brother Andy, earned from his successful medical practice in the US.
This information begs several questions:
Why was Andy Bautista continuing to act as a "designated family treasurer" even after he assumed very high profile government posts since 2010?
As an accomplished legal professional, Andy should be very cognizant that any money linked to him, whether from his siblings or parents, must be beyond reproach. As the former head of the PCGG, whose chief job is to go after the hidden wealth of the Marcoses, Andy chased after their money trail (which has long gone cold) and would go after any and possibly all leads that linked onshore and offshore bank accounts to the Marcoses. Was he not aware that these bank accounts could be construed as unexplained wealth? Maybe he did not think that the same standards he applied to the Marcoses could also be applied to him? Or perhaps the lessons of the Corona impeachment, where legitimately obtained assets that remain undeclared in his SALN could be severe grounds for impeachment, did not sink in?
Why didn't Andy Bautista create some form of "blind trust" for his family's money, that would erect a legal barrier between him and his family's money? As a top lawyer, he could have possibly drawn up the trust himself or gotten help from his extensive network in the legal profession.
Why didn't Andy Bautista just hand off the management of his family money to another competent financial professional when he assumed government posts way back in 2010?
As a former head of the Kuok Group Philippines and as a former international lawyer specializing in mergers and acquisitions and/or project finance, Andy Bautista would have had the network to entrust this matter to another very capable finance professional. Why did Andy Bautista put a significant chunk of his family money in Luzon Development Bank (LDB), a small development bank?
One of the chief tenets of a treasurer is to manage risk. As designated family treasurer, he was tasked with three things:
Preservation of Capital
Liquidity
Growth
Preservation of Capital
A cursory look at LDB's published statement of financial condition as of March 2017 would reveal that the bank is not very stable.
First of all, it is losing money at an annualized rate of -35.01% as of the first quarter 2017. At Php 620.88 million, its Gross Non-Performing Loans (Gross NPLs) is almost twice its Stockholder's Equity of Php 345.43 million. So any large write-off of these NPLs could severely impair a very large chunk of its equity. As of March 2017, LDB's Total Capital Adequacy Ratio (Total CAR), the BSP's preferred measure of financial strength, stood at 6.74, barely above BSP's minimum of 6.00 and way below BSP's recommended minimum of 10.00.
LDB has routinely been flagged by this author as one of the Top Distressed Banks in the Philippines since March 2014. As of March 2017, the ratio of its Distressed Assets to its Total Capital Cushion is 182.24%, significantly above the threshold of 100% at which a bank is considered risky.
If and when the bank goes bust, the deposits of Andy's family would be insured up to a maximum of Php 500,000.00 per depositor. So, if the bank goes bust, Andy's family deposits are insured for less than 1% of what he is purported to have just in LDB.
Liquidity
With only Php 5.75 billion in Assets and only Php 5.07 billion in deposits, LDB is a small bank. By depositing anwhere from Php 200 million to as much as Php 329 million in just one bank, these deposits would amount to as much as 3.94% to 6.57% of the bank's deposity liabilities. This is a fairly sizeable position in the bank. Moreover, as of March 31, 2017, the bank only had Php 141.83 million in cash. So, any substantial withdrawal (like Php 50 million or more) would cause the bank some cash flow problems. It would take a few days for the bank to withdraw some of its reserves with the Philippine Central Bank (BSP) to fund a substantial withdrawal by the Bautista family.
Growth
Since June 2013, LDB's deposits grew from around Php 2.54 billion as of June 2013 to as much as Php 5.22 billion just three years later - June 2016.
As a consequence of this rapid growth in deposits, it's loan portfolio grew very fast too, from just Php 1.79 billion as of June 2013 to as high as Php 3.49 billion in March 2015.
However, the growth in LDB's loan portfolio was outpaced by the rapid growth in NPLs. As of June 2013, only 11.67% of the bank's Total Loan Portfolio consisted of NPLs. Today, as of March 2017, that figure now stands at its highest ever: 20.35% of Total Loans.
Since March 2015, LDB began to lose money at an alarming rate. Its Return on Equity dropped to a negative 37.77% annualized rate and has had a negative 30% handle since then.
As a result of its massive losses, LDB's Stockholder's Equity is a shadow of its former self.
Not surprisingly, its Capital Adequacy Ratios, BSP's preferred indicator of financial strength, has consistently gone downhill and has fallen below BSP's own recommended minimum of 10.00%.
Lately, its Distressed Asset Ratio has hit a new high and has climbed above 100%, the threshold at which a bank is considered risky, since March 2015.
What could explain why Andy Bautista put so much money in LDB? Thinking Pinoy has advanced one theory.
But another explanation could be much more prosaic. It's possible that LDB that in this low interest rate environment, the bank was not earning much with a Return on Equity of 1.26% as of September 2013. The bank might have been forced to jack up rates on deposits to enlarge its deposit base. That would have attracted a lot of depositors, including the deposits from Andy Bautista's family. But LDB had to earn a spread over its jacked up rates, meaning the interest rates on its loans would have been jacked up as well. But the massive growth in deposits meant that this money had to be lent out and soon. Its lending standards could have gone down or the only borrowers who would be willing to take up the higher interest loans would have been the riskier ones. Hence, the massive rise in NPLs and losses for LDB.
Home Prices in China, as measured by Shanghai Home Prices, have recently begun to plateau, signifying a possible slowdown in the real estate sector for 2017.
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Hong Kong Home Prices have resumed their upward trend after dipping in 2016 and have hit new highs as of the first quarter of 2017.
Both real estate markets have surpassed their inflation adjusted levels by a very wide margin.
At 109.77%, 8990 Holdings still has the most Real Estate Receivables relative to its Stockholder's Equity in 2016. Next is Century Properties at 70.49% of Stockholder's Equity, followed by Ayala Land at 46.92% of Stockholder's Equity.
Naturally, 8990 Holdings still has the most problematic Real Estate Receivables. Problem Real Estate Receivables amount to 11.10% of its Stockholder's Equity as of 2016. Believe it or not, this figure is way down from the 20.40% it posted in 2015. Ayala Land's Problem Real Estate Receivables amount to 6.72% of its Stockholder's Equity in 2016. Neck and neck for third place are SM Prime Holdings and SM Investments with Problem Real Estate Receivables amounting to 3.68% and 3.61% of their respective Stockholder's Equity.
SM Prime Holdings also holds the dubious distinction of having the highest percentage of Past Due But Not Impaired Real Estate Receivables relative to Total Real Estate Receivables in 2016. This is closely followed by Ayala Land with 14.63% of its Real Estate Receivables in Past Due status. Both Vista Land and 8990 Holdings have similar ratios with 9.58% (Vista Land) and 9.44% (8990 Holdings) of its Real Estate Receivables falling Past Due in 2016.
Perhaps because the index has been in its infancy but according to BSP's Residential Real Estate Price Index (RREPI) investors in residential real estate have been experiencing a nausea-inducing roller-coaster ride in terms of asset prices.
The swings in the areas outside the National Capital Region (Ex-NCR) are particularly problematic. Within the past two years, RREPI - All Types for the Ex-NCR area has swung from a high of 125.7 in the second quarter of 2016 from a low of 106.2 as of the 2nd Qtr. of 2015, an increase of 15.51% in just one year. Then in the next quarter, the index drops by 10.74% to 112.2 as of the 3rd Qtr of 2016. The RREPI - All Types index for the Ex-NCR area now rests at 116.8 as of the 1st Qtr 2017 or 4.10% higher than what it was just two quarters ago.
This volatility of the Ex-NCR RREPI-All Types has influenced large swings in the overall Philippine RREPI-All Types. Since its inception, the nationwide index has swung 10.18% from bottom to top. No doubt, the volatility of the Philippine-wide RREPI-All Types was tempered by the low volatility of the NCR RREPI - All Types, which fluctuated by only 2.63% from peak to trough.
The same dynamic has been playing out as you drill down into the index's sub-sectors, whether they be Single Detached Homes, Duplex, Townhouses, or Condominiums. Ex-NCR is volatile while NCR has smoother fluctuations, leading to a more volatile nationwide index for each sub-sector.
The Philippines was one of the last countries in the ASEAN to institute a National Residential Real Estate Index. Other countries have done this much sooner. However, late is better than never. In the meantime, for planning purposes, the index has limited utility.
Last Thursday, June 29, 2017, the Bureau of Economic Analysis released their third estimate of 2017's first quarter GDP growth rate: 1.40%. For the fourth quarter of 2016, GDP grew by 2.1%.
The economic recovery from the Great Recession has been downright sluggish, never taking off beyond the 3.00% growth rate that signals a robust economic recovery and always flirting with the 1.00% growth rate that signals a stalling economy.
On a nominal basis, the economy is 31% larger than what it was ten years ago. In real terms, it's just 13% larger.
On a per capita basis, real GDP grew by only 5.34% for the past ten years, for a compounded annual average growth rate of only 0.52% per annum - far less than the so-called "Hindu Rate of Growth" threshold of 1.30% per annum. This growth rate is so slow that it is almost imperceptible.
To top it all, the growth has not been evenly distributed. As of year-end 2015, Real Median Household Income stood at $56,516 or 1.58% below the Real Median Household Income of $57,423 in 2007 and 2.41% below that of 1999 ($57,909). Almost all the gains in the economy have been going to the upper echelons of US society.
Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990. This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.
As of the 1st Qtr of 2017, Construction GV as a percentage of GDP now stands higher at 12.01% of GDP -near the all-time high of 12.22% (posted in the 4th Qtr 2016) for the past 25 years. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 4.9% above equilibrium, a rise of 4.9% in just fifteen months. Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.
Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin. The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore, Hong Kong, and the Philippines.
Singapore
Singapore's home prices have now been declining for fourteen straight quarters, which, according to Bloomberg, is the longest losing streak in five years. Home prices are still 66.32% above their year-end 2004 levels. Overall prices levels, as measured by inflation have just increased by 29.19% since year end 2004. In other words, for the past ten years, Singaporean home prices have outpaced inflation by almost than 40 percentage points.
Malaysia
Neighboring Malaysia's House Price Index now stands at 262.42 as of the third quarter 2016, 162.42% higher than year-end 1998 levels. General price levels as of the third quarter 2016 are only around 48.41% higher than their year-end 1998 levels.
Thailand
In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54, just 0.54% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08 posted in the third quarter of 2009. Since 2013, home prices have rebounded to 114.50 or 14.50% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 34.51% above their year-end 2004 levels. In other words, Thailand Home Prices have lagged inflation by as much as 20.01% since their year-end 2004 levels.
Indonesia
Meanwhile, in Indonesia, home prices have shown no signs of slowing down their upward trajectory. In fact, prices are now at 146.32 or 46.32% above their first quarter 2007 levels. Inflation, however, has marched higher. General prices are 77.52% above first quarter 2007 levels, lagging inflation by 31.20%.
Philippines
Philippine house price index stands at 225.44% as of the first quarter 2017 or over 125.44% above their year-end 2004 levels. Philippine home prices have posted one of the largest 10 year gains among all the countries considered in this blog post. Philippine home prices have outstripped inflation by more than sixty percentage points. General prices stood at 164.63% or 64.63% above their year-end 2004 levels. Like Indonesia, Philippine home prices have so far no signs of slowing down their upward trajectory for the foreseeable future. The question is, is this momentum sustainable? Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices? That remains to be seen.
At around this time last year, in a blog post entitled "The Philippine Real Estate Bubble Has Also Burst For... Ayala Land!", we wrote about how the company's past due installment contract receivables (ICRs) for real estate have quadrupled in 2015 from Php 1.95 billion in 2014 to Php 8.80 billion in 2015. Much of the past due ICRs were severely past due - over 120 days past due.
Total past due ICRs comprised as much as 13.4% of the entire Real Estate ICR portfolio in 2015.
Today, that figure is even higher. As of year-end 2016, 14.63% of Real Estate ICRs are now past due. More than one in seven Real Estate ICRs is now past due.
The credit quality has gotten worse, not better.
The amount of severely past due Real Estate ICRs (over 120 days past due) has grown by almost 80% in just one year, from Php 3.58 billion in 2015 to Php 6.43 billion in 2016.
Real Estate ICRs over 120 days past due now comprise 8.11% of total Real Estate ICRs in 2016.
Past Due But Not Impaired Real Estate ICRs now comprise 6.72% of the company's Stockholder's Equity as of 2016, up from 5.88% in 2015 and more than four times the 1.60% level the company posted in 2014.
Despite this, the company's Impaired Real Estate ICRs have dwindled to zero in 2016. Around Php 9.55 million of Impaired ICRs, which have been impaired since at least 2012, were written off in 2016.
Sooner or later, the company will have to recognize these past due Real Estate ICRs as impaired and the impairments will have to be written off... someday. We just don't know when. But if Ayala Land, one of the country's most prestigious and largest real estate companies, cannot handle its growing Real Estate ICR problem amid a booming economy, this does not bode well for the rest of the industry.
