The American Rate of Growth

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 7.11% in the past ten years - or roughly a compounded annual average growth rate of only 0.69% 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 0.69% 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.

How Dividend Policy Has Hampered PLDT and Globe Telecom's Ability to Meet Market Demand - Or Why We Can't Have a Nice Internet

Much has been said about how slow and expensive the Internet is in the Philippines. Internet activists like to blame IP Peering. The telcos themselves say that the process of putting up cell towers is very slow and full of red tape.

Dividend Policy:

But there is another reason why the telcos have not kept pace with market demand: They take out all the money they make and then some.

From 2011 to 2017, the duopoly made Php 274.86 billion (roughly US$ 6.16 billion during the same period) but dividended out to its commons shareholders approximately Php 298.71 billion (roughly US$ 6.71 billion) over the same time period, resulting in an overall dividend payout ratio of 108.68%. This dividend payout ratio is more consistent with that of a cash cow being milked than that of a fast growing company seeking to reinvest its profits to build up its business. The chief culprit was PLDT which paid out Php 228.28 billion in dividends during this period, which is 118.59% more than its Php 192.50 billion in net income over the same time frame. Yes, Globe Telecom had a lower dividend payout ratio - but only slightly. It paid out Php 70.43 billion or 85.51% of its Php 82.36 billion in net income.

Source: PLDT & Globe Telecom Financial Statements

As a result, their combined Total Stockholder's Equity base has gone down instead of up. Since 2011, Total Stockholder's Equity of the two telcos has gone down 11.34% to Php 177.56 billion as of 2017 from Php 200.26 billion as of year-end 2011.

The decline was due to PLDT. Its equity base went down 26.89% from Php 151.83 billion in 2011 to just Php 111.00 billion six years later. In contrast, Globe Telecom's equity base went up by 37.44% during the same period to reach Php 66.57 billion in 2017.

Exploding Internet

This "harvesting" of dividends took place at a time internet penetration rates exploded. From 2011 to 2016, Internet penetration per 100 persons almost tripled from 1.88 to 5.46.

Source: World Bank

More and more people experienced the internet through their mobile phones rather than fixed lines.

Naturally, the exploding demand for internet required massive investments in broadband infrastructure, which the telcos failed to provide. Edgardo Cabarios, the director of the Regulation Branch of the National Telecommunications Commission (NTC) said that the country needed to invest "Php 800 billion (US$ 18 billion) on its broadband infrastructure but the private sector is only investing Php 60 to Php 70 billion (US$ 1.4 to US$ 1.6 billion) a year."

Given that the life-cycle of internet communications technologies is at most seven years (and may be even faster), this investment translates to a required investment per year of US$ 2.57 billion a year. What the telcos actually spent fell far short of that. They were under-investing to the tune of over US$ 1.0 billion a year.

This gap between the required actual investment is real, cumulative, and growing. If the required capex had begun in 2011 (and there is no reason not to believe that given the rapid propagation of smartphones since 2007 and the global commercialization of 4G LTE technology in 2009), the telcos spent a total of US$ 10.69 billion or US $ 7.31 billion short of the required US$ 18.00 billion investment.

 Much of this investment gap could have been eliminated from the get go had the telcos been less "extractive". The dividends distributed to shareholders is almost a mirror image of the investment gap the telcos faced. Had the telcos plowed their earnings back into their companies, the cumulative investment gap would be a paltry US$ 0.61 billion today. This is an amount they could have easily raised from borrowings because their equity base would have been almost three times larger than it is today.

Singapore Breaks its Controlled Slide of House Prices While Philippine House Prices Hit New Highs in 2017 Q4

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 which have been declining for fourteen straight quarters, have resumed their upward trend. Home prices have rebounded by 1.51% off the low of 166.15 as of the second quarter of 2017. Howevery, home prices are still  68.66% above their year-end 2004 levels. Overall prices levels, as measured by inflation have just increased by 29.67% 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 267.28 as of the third quarter 2017, 167.28% higher than year-end 1998 levels.  General price levels as of the third quarter 2017 are only around 53.54% higher than their year-end 1998 levels.

 Thailand

 Thailand's home prices have still not kept up with inflation. As of the fourth quarter of 2017, home prices are just 19.22% above their year-end 2004 levels, while the inflation index is 34.99% above its 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 150.44 as of the fourth quarter of 2017 or 50.44% above their first quarter 2001 levels. Inflation, however, has marched higher. General prices are 82.71% above their first quarter 2007 levels. House prices, therefore, have lagged inflation by 32.27%.

 Philippines

Philippine house price index stands at 241.08% as of the fourth quarter 2017 or over 141.08% 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 over seventy percentage points.  General prices stood at 168.54% or 68.54% 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.

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

Traffic gridlock along EDSA (Photo from Inquirer.net)

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.

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.

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.

The Relentless Climb of the Hong Kong Real Estate Market

 In the third quarter of 2017, the Hong Kong House Price Index rose by 1.83% quarter-over-quarter. On a year-over-year basis, the index rose by an astounding 17.65%.

The gains have been broad-based., spread out through all classes. The gains in Class A residences (less than 40 sq. m. in size) have out-sprinted the gains all other classes. Gains in Class E residences (greater than 160 sq. m. in size) are 30% lower than those of Class A.