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Saturday, February 24, 2018

Metro Manila Loses a Staggering 21% of its Economic Output to Traffic Congestion!

Traffic gridlock along EDSA (Photo from

In 2017, traffic congestion in Metro Manila (NCR) cost a staggering Php 3.5 billion (roughly US$ 70 million) a day in lost economic opportunities. This is up from an estimated Php 2.4 billion (US$ 21 million) a day in 2012. In 2017, traffic congestion losses amounted to Php 1.28 trillion (US$ 25 billion). This is 8.09% of the entire country's GDP of Php 15.80 trillion (US$ 313 billion).

It also amounts to 21.21% of the NCR's estimated Php 6.02 trillion GDP (US$ 120 billion) in 2017.

Despite this, the country was able to grow its economy by 6.67% in 2017, landing it among the top ten fastest growing economies in the world. Had the traffic congestion problem been solved, it would have grown at more than double that rate: 15.29%. In other words, traffic congestion in Manila robbed the country of an additional 8.63% growth rate on top of the 6.67% growth rate it posted in 2017.

These economic losses amount to Php 6,681 or US$ 133 for every man, woman, and child in the country in 2017. This is no small amount in a country wherein the estimated median wealth per adult was estimated at just $883 in 2017.

Thursday, February 22, 2018

BSP's Reserve Requirement Ratio Cut Is Undeniably Very Procyclical at the Top of the Business Cycle

On February 15, 2018, the BSP said that it would lower bank's reserve requirement ratio from 20% to 19%, a move that is projected to inject at least Php 80 billion (US$ 1.53 billion) into the financial system.

This move was ostensibly done to mitigate the effects of global market volatility in the first two weeks of February 2018. But it is easy to get the impression that BSP panicked because the announcement was a surprise and was made after an unscheduled policy meeting.

This move is also undeniably pro-cyclical, coming near the top of the business cycle:
"Such an infusion of funds would risk adding to inflationary pressures in the booming economy. Some market watchers fear it is already at risk of overheating..."
It will also serve to boost asset inflation even further. Philippine interest rates are already negative as it is and have been for some time. Since 2010, anyone investing in Philippine T-Bills would have seen negative to marginal real returns after accounting for inflation. As of January 2018, the real interest rate on the 364 day T-Bill was a negative 1.12%. Increasing the money multiplier by 5.3% will only serve to lower negative real interest rates even further - at least in the short run.

To boost real returns, investors will have to pile into physical and financial assets which are already at record high prices.

To wit, the Philippine Stock Market is already at or near record highs:

And so is the real estate market:

It is no coincidence that the greatest increases in asset inflation took place at a time when real interest rates were profoundly negative - as much as 2.3% during a four year period from 2011 to 2014 and in the last two years (beginning in 2016 to present).

To seek yield, investors will have to pile into even more economically marginal investments. When the business cycle turns, as it always does, expect the NPLs to pile up and put our banking system and the Philippine economy on the brink of collapse once again. A pro-cyclical macro policy taking place at the top of the business cycle will only make the bottom of the cycle that much worse. Policy makers should consider macro policies that moderate the top of the economic cycle: counter-cyclical at the top and pro-cyclical at the bottoms. In this way, the tops are less overheated and the bottoms are not as traumatic for the economy as a whole.

Thursday, February 8, 2018

Believe It or Not, The US Real Estate Market Has Room to Run

Believe it or not, the US Real Estate Market has room to run. Despite the reflation of the US Housing Bubble to pre-financial crisis highs, investment in the sector has been sorely lagging.

After soaring to a near all-time high of 6.69% of GDP in 2005 (only the post-war housing boom circa 1950 was marginally higher - by 0.02%), Private Residential Fixed Investment plunged to an all-time low of 2.46% of GDP in 2010. Today, that ratio has recovered to 3.87% of GDP as of 2017. This is still way below the ratio's historical average of 4.84% of GDP for the past seventy years.

The data is borne out of Housing Starts data. Housing Starts have recovered, but not to pre-crisis levels.

Moreover, housing starts have not kept us with population growth.  As of December 2017, New Privately Owned Housing Units Started as a % of Total US Population was just 0.36%, way below the historical average of 0.60% established since 1959.

This under-investment accumulates and the cumulative underhang of Private Residential Fixed Investment in the US stands at a -9.28%, lower than the previous record low of -2.21% of GDP in 1997, a few years before the US Housing Boom of the 2000's.

This will only serve to lay the groundwork for another spectacular US Housing Boom in the years to come, perhaps in the 2020's or 2030's.