Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

 

If you depreciate the money, it makes everything look like it’s going up – Ray Dalio 

In this issue: 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

I. Nota Bene—Data Revision and Structural Divergence

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal

III. The Wile E. Coyote Phase: Optics in Motion

IIIA. Broad-Based Plateauing Across Core Sectors

IIIB. Liquidity Redirected, Not Transmitted

IIIC. The NPL Paradox

IIID. Duration Losses Surface First

IIIE. The Redistribution of Strain

IIIF. Reserve Cuts: Policy Choreography in Motion

IIIG. Late-Cycle Containment

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment 

Stability by Refinancing: The Philippine Banking System Under Containment 

I. Nota Bene—Data Revision and Structural Divergence 

The BSP revised December’s currency-in-circulation growth from 17.7% to 6.4%. This does not alter the central observation: liquidity creation at the monetary authority level continues to exceed the pace of circulation in the broader economy, which highlights the opacity of late-cycle aggregates. The argument herein rests on persistent balance-sheet divergence, or that stability is maintained through optics rather than fundamentals. 

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not 

Liquidity is not only rising — it is accelerating again. Money supply is trending higher. Policy rates have been cut. Reserve requirements have been reduced. Deficit spending has widened toward levels last seen during the pandemic. Yet GDP growth has slowed markedly: Q4 2025 expanded just ~3 percent year-on-year, bringing the full-year growth to ~4.4 percent, the slowest post-pandemic pace outside the crisis period. 

When liquidity expands as output contracts, the question is no longer about stimulus. It is about containment — and about who ultimately absorbs the risk.

Figure 1

In our previous post, we noted that the BSP’s currency issuance — or currency in circulation on the central bank’s books — surged by initially reported ~17.7 percent in December to a historic Php 3.205 trillion (Php 2.897 trillion revised).  (Figure 1, topmost and middle charts) 

In the same month, however, currency outside depository corporations — the stock of cash actually held by the public — grew only ~6.6 percent to Php 2.522 trillion. The gap between issuance (as captured in the Monetary Authorities Survey) and circulation outside banks (as captured in the Depository Corporations Survey) is the widest on record. 

This unprecedented growth differential signals a breakdown in monetary transmission. Liquidity is being created at the central bank level, yet it is not translating into proportional expansion of cash held by the public. Instead, it is accumulating within the banking and sovereign balance-sheet perimeter. 

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage 

Despite the revision, broad money and financial system leverage metrics have pivoted higher. (Figure 1, lowest image) 

Monetary aggregates (M1 and M2) and domestic claims relative to GDP moved back up in Q4, reaching roughly 70.4 percent, 71.8 percent, and 80.6 percent, respectively — levels consistent with tighter financial balance-sheet conditions. 

Domestic claims, which include net claims on the central government (NCoCG) and claims on other sectors, broadly measure credit leverage within the financial system. 

In 2025, lending to the government accounted for ~27.2 percent of total claims (slightly higher than in 2024), while lending to the private sector was ~72.8 percent (slightly lower than in 2024), even as overall claims rose ~10 percent YoY and M1/M2/M3 expanded by 7.1 percent, 7.5 percent, and 7 percent YoY, respectively. 

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction 

Fiscal metrics underscore the scale of backstopping. As of end-November 2025, the national government’s budget deficit reached ~Php 1.26 trillion for the first eleven months — second only to the pandemic year 2020 on a cumulative basis, and representing ~81 percent of the government’s full-year Php 1.56 trillion target. Total revenues rose modestly, while expenditures continued to outpace them, driving the gap. 

Figure 2 

The impact of accelerating liquidity is increasingly visible in financial markets. 

The PSEi 30 has rallied alongside higher turnover despite slowing GDP, while the yield curve has steepened at the front even as long-end yields remain elevated — suggesting that liquidity is facilitating issuance absorption and duration risk transfer rather than signaling stronger real-economy prospects.  PSE & PSEi chart data based on original MAS data. (Figure 2, topmost and second to the highest windows) 

Philippine Treasury market turnover reached record levels in 2025. But volume alone is an incomplete signal of improved confidence. High turnover can reflect repositioning, dealer balance-sheet management, policy alignment, geopolitical shock absorption, or constrained domestic savings with limited real-economy outlets. (Figure 2, second to the lowest image) 

The curve matters more than the prints: its slope embeds term premium, duration appetite, and credibility. (Figure 2, lowest diagram) 

If confidence were broad-based and durable, normalization would occur across tenors. Instead, activity remains selective, slopes unstable, and duration demand cautious—liquidity without conviction. 

Across equities, fixed income, and foreign exchange, the pattern is consistent: liquidity is sustaining financial asset turnover while real-economy transmission weakens 

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal 

The peso tells a similar story. Periodic strength has coincided with weak-dollar phases and sovereign borrowing inflows, yet the underlying savings–investment gap and elevated fiscal financing requirements continue to exert structural pressure. 

The Philippine government raised approximately USD 2.75 billion from global capital markets in January. 

Over the past weeks, USD/PHP has fallen from its record highs to test the 58 level. 

Exchange-rate stability appears less a reflection of external balance improvement than of active liquidity management and capital flow support. 

A key structural signal lies in the growing divergence between the BSP’s Monetary and Financial Statistics (MAS) and the Depository Corporations Survey (DCS). The MAS consolidates the central bank’s balance sheet plus the national government’s monetary accounts, including direct currency issuance and central bank operations. The DCS, by contrast, consolidates the balance sheets of the BSP and all other deposit-taking institutions (commercial banks, thrift banks, rural banks, etc.), presenting money supply and credit aggregates after eliminating intra-system holdings. This methodological difference means the MAS can register rapid currency issuance that does not immediately appear in the broader economy’s cash circulation as captured by the DCS — a gap that has rarely been this wide. 

This divergence — excess monetary creation not translating into commensurate growth in broad money or real economic activity — reflects a balance-sheet recession dynamic, where traditional monetary accommodation fails to circulate through productive economic channels. 

As banks and firms prioritize balance-sheet repair over fresh productive lending, excess liquidity remains trapped within the financial system. Consistent with Hyman Minsky’s financial instability hypothesis and Richard Koo’s balance-sheet recession framework, monetary accommodation increasingly sustains asset turnover and duration/risk transfer rather than output, employment, or external balance improvement. 

III. The Wile E. Coyote Phase: Optics in Motion 

December’s banking data do not depict stabilization. They depict redistribution. 

Slower lending growth emerged despite a string of interest rate cuts — a development even the mainstream press finally acknowledged. 

Universal and commercial bank lending (net of repos) rose 9.2% year-on-year in December — the softest expansion since February 2024’s 8.6%. 

The news pointed to a 5.4% contraction in lending to construction firms, attributing the slowdown to reduced public spending. But construction represents only 3.7% of total bank exposure. It cannot explain system-wide deceleration. 

The drivers were broader — and deeper. 

IIIA. Broad-Based Plateauing Across Core Sectors 

Three major sectors — accounting for roughly 42% of total bank portfolios — drove the slowdown. 

• Manufacturing (8.6% share) contracted 9.43% year-on-year in December, its seventh consecutive monthly decline and the second-deepest contraction since September 2025’s 10.44% drop. 
• Real estate (≈20% share) — the system’s largest borrower — slowed to 8.3% growth, its weakest pace since October 2023. 
• Consumer lending (13.5% share) — previously the fastest-growing segment — decelerated to 21.4%, the slowest since September 2022. This follows an extraordinary 33-month streak of growth exceeding 22%. 

This is not marginal noise.

Figure 3

Credit expansion appears to be plateauing across its core engines, as bank lending to both the production sector and households shows signs of inflection. (Figure 3, topmost pane) 

Meanwhile, GDP growth has slowed for two consecutive quarters — from 3.95% in Q3 to 3% in Q4. (Figure 3, middle image) 

Rate cuts were marketed as stimulus. Yet lending momentum peaked as output weakened. 

IIIB. Liquidity Redirected, Not Transmitted 

As lending to the general economy softened, activity within the financial system intensified.

Interbank lending and reverse repurchase transactions (with both the BSP and other banks) surged toward milestone highs. (Figure 3, lowest graph)

Figure 4

Bank borrowings from capital markets jumped 17.3% to an all-time high of Php 1.96 trillion, largely reflecting bond positioning. Bills payable also rose to one of the highest levels on record. (Figure 4, top and second to the highest images) 

Net claims on the central government increased 10.8% to a fresh record of Php 6.135 trillion. Duration exposure deepened. (Figure 4, second to the lowest diagram) 

Yet Held-to-Maturity (HTM) securities increased only modestly (+1.2% YoY), despite the BSP’s reclassification of these instruments under “debt securities net of amortization.” 

Risk did not disappear — it moved.

Despite liquidity injections, bank cash balances contracted 19.5% year-on-year in December.

Cash-to-deposit and liquid-asset-to-deposit ratios improved slightly but remain strategically low. (Figure 4, lowest visual) 

System liquidity appears abundant in headline aggregates. 

At the transactional margin, it is thin.

IIIC. The NPL Paradox

Figure 5 

Non-performing loans had been rising alongside slowing GDP through Q3. 

In November, they softened modestly. In December, they fell sharply. (Figure 5, topmost and middle graphs) 

Gross NPLs declined in peso terms — not merely as a ratio effect — even as output had weakened for two consecutive quarters. While year-end charge-offs, restructurings, and classification adjustments can produce seasonal improvements, the magnitude of the drop contrasts with deteriorating macro conditions. 

Either borrowers experienced an abrupt recovery amid a slowdown — or recognition dynamics shifted. 

There are only a handful of mechanical pathways through which NPL ratios decline in such an environment:

• Restructurings
• Charge-offs
• Denominator expansion
• Regulatory relief
• Classification effects 

The burden of proof shifts to fundamentals. 

IIID. Duration Losses Surface First 

While credit metrics improved optically, market losses intensified. 

In December, Available-for-Sale (AFS) securities expanded 22% and now account for roughly 45% of financial assets, rapidly approaching Held-to-Maturity’s 48% share. (Figure 5, lowest chart)

Figure 6

Despite generally easing Treasury yields, financial investment (accumulated) losses surged in December from Php 1.98 billion in November to Php 20.16 billion. (Figure 6, topmost pane) 

For Q4, losses on financial assets reached Php 42.396 billion — the third consecutive quarter exceeding Php 40 billion — levels previously seen only during the pandemic recession. (Figure 6, middle diagram) 

Full-year 2025 financial asset losses totaled Php 159.7 billion, materially weighing on profitability. Banking system net income growth slowed sharply: Q4 net income declined 0.78% year-on-year, while full-year 2025 profit growth decelerated to 3%, down from 9.8% in 2024. 

From Q3 to Q4, return on assets (ROA) decreased from 1.46% to 1.41%, and return on equity (ROE) declined from 11.71% to 11.46%, suggesting both measures may be beginning to trend downward. (Figure 6, lowest chart) 

The pressure came less from exploding credit costs than from market volatility. This is not synchronized improvement. It is stress migration.

IIIE. The Redistribution of Strain 

When securities losses rise, repo dependence increases, sovereign absorption intensifies, liquidity buffers remain fragile — yet NPL metrics improve abruptly — the pattern is not stabilization.

It is reallocation. 

Late-cycle systems often preserve surface calm by shifting where strain appears:

• Duration losses surface before credit losses.
• Market volatility compresses earnings before defaults spike.
• Provisioning pressure eases as classifications adjust.
• Headline ratios improve even as balance sheets stretch. 

This is the AFS Wile E. Coyote dynamic accelerating. The system appears suspended — supported by liquidity, refinancing structures, sovereign absorption, and accounting elasticity — even as underlying cash-flow conditions soften. 

Stability is maintained through motion, not repair.

IIIF. Reserve Cuts: Policy Choreography in Motion 

In February 2026, the BSP cut reserve requirements across bank-issued bonds, mortgage instruments, and trust accounts. Reserves on bonds fell from 3% to 2% for universal and commercial banks; thrift banks saw their 6% requirement scrapped; long-term negotiable deposits lost their 4% ratio; and most strikingly, trust and fiduciary accounts dropped to zero from double-digit levels. 

The BSP framed the move as liquidity-neutral, but the timing betrays intent: this was balance-sheet relief, not growth. Banks absorbing securities losses, repo dependence, and sovereign absorption were granted regulatory breathing room. 

This is choreography, not repair. Reserve cuts thin liquidity buffers to ease optics, shifting fragility from bank balance sheets into the broader system. Once again, containment through redistribution, not stabilization. 

IIIG. Late-Cycle Containment 

This pattern aligns with Minsky’s late-cycle stabilization phase: fragility becomes politically and financially intolerable, prompting increasingly active management of volatility and balance-sheet optics. Stability is no longer organic — it is administered. 

It also echoes Kindleberger’s late-cycle dynamics, where imbalances are contained and recognition deferred. Transparency thins. Risk redistributes. The system appears calm — until price signals overwhelm narrative control. 

It resembles Kornai’s soft-budget constraint dynamic: losses are socialized, recognition deferred, discipline diluted. 

The system is being managed. 

But when liquidity sustains refinancing more than output, when duration risk migrates faster than credit risk, and when monetary aggregates expand faster than money circulating in the real economy, the adjustment rarely announces itself through ratios.  

It accumulates quietly on balance sheets. Then it emerges through prices — often abruptly. 

And economics does not yield to optics.  

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

Figure 7

The Philippine financial system is highly concentrated. Banks control roughly 83.1% of total financial assets, with universal and commercial banks accounting for about 77.4% (as of December 2025). (Figure 7, upper chart) 

At the same time, the PSEi 30 is itself concentrated in a handful of large-cap names. 

Since 2024, the top five heavyweights have accounted for over 50% of the index weight. This concentration has been led by ICTSI, which not only surpassed former leader SM Investments but, through a string of record highs, has pushed its weight in the PSEi 30 to over 18%— a single issue now accounts for nearly one-fifth of the headline index’s performance! (Figure 7, lower graph) 

In such an environment, late-session flows (“afternoon delight” or “pre-closing” activity) into a small number of index-heavy stocks can have disproportionate effects on headline market performance. Whether driven by liquidity management, portfolio rebalancing, balance-sheet considerations, or index performance objectives, this clustering of activity near the close raises questions about the quality and integrity of price discovery. 

This is not merely a capital markets issue. 

When asset prices become reference points for macro stability—and when large financial institutions sit at the center of both credit creation and market intermediation—price management, volatility smoothing, and liquidity containment can feed back into balance sheets. 

The result is a reflexive loop: 

• Market stabilization supports balance-sheet optics.
• Balance-sheet stability reinforces the narrative of macro resilience.

But when stabilization becomes a policy objective—whether in equity indices, exchange rates, or the yield curve—intertemporal trade-offs accumulate. 

Those trade-offs do not disappear. They re-emerge in funding structures, duration exposure, and income volatility—and ultimately in market volatility. 

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

What we are observing is not a conventional stimulus cycle. It is a containment cycle. 

• Liquidity is growing — but circulation is narrowing.
• Credit is refinancing — but not compounding productive output.
• Market turnover is rising — even as real growth decelerates. 

This is consistent with the balance-sheet recession dynamic outlined previously: private sector caution meets public sector duration absorption, while monetary aggregates expand within the institutional perimeter. 

In such a regime, risk does not disappear. It migrates. 

• Credit risk becomes duration risk.
• NPL ratios improve through denominator expansion.
• Volatility compresses through active management. 

But arithmetic remains.

When liquidity sustains rollover more than real investment, growth slows even as balance sheets expand. And when duration risk concentrates faster than income growth, the system becomes increasingly sensitive to price signals rather than flow indicators. 

The adjustment, when it comes, is rarely triggered by one dramatic data release. It emerges when price discovery outpaces narrative control. 

That is late-cycle dynamics. 

Policy stimulus eventually fails not because liquidity stops expanding — but because the real capital base can no longer validate the financial claims built upon it. 

Narratives may shape perception, but only economics compounds 

____

Reference: 

Prudent Investor Newsletter, Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown, Substack, February 08, 2026

 

 

 

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown

   

People don’t realize how hard it is to speak the truth to a world full of people who don’t realize they’re living a lie– Edward Snowden 

In this issue

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown

I. Q4 GDP Plunge: From Accommodation to Balance-Sheet

IA. Not a Shock, a Signal: Context Before the Q4 GDP Collapse

IB. Policy Accommodation Without Growth

IC. From Accommodation to Balance-Sheet Stress: The Currency Signal

ID. Debt-Financed Growth: When GDP Expansion Is Fully Absorbed by the State

IE. Liquidity Without Output: January CPI as Leakage

IF. Labor Market Confirmation, Not Contradiction

II. Why Institutions Miss Turning Points

IIA. The Jobs and Poverty Paradox

IIB. Corruption as Symptom, Not Cause

IIC. Public Spending Held Up — It Was Construction That Slumped, and Households That Broke

IID. Crowding Out and the Long Decline of Household Consumption

III. Select GDP Highlights

IIIA. Industrial Stress: Electricity GDP Enters Recession, Policy Scaffolding: Stabilizing Cash Flows, Not Demand

IIIB. Export Strength Without Domestic Production; External Demand Masks Weak Domestic Absorption

IIIC. Trade Expansion Signals Supply-Side Outgrowth; Real Estate Growth Amid Record Vacancies

IIID. Financial Sector Expansion Through Refinancing and Forbearance

IIIE. The Core Contradiction: GDP Without Balance-Sheet Healing

IV. Political Economy as Verdict, Not Sidebar

IVA. Entrenchment, Not Episodic Failure

IVB. The Political Economy Loop

IVC. Conclusion Spending as Sacred — Cost as Afterthought 

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown 

Why record liquidity, rising debt, and policy accommodation failed to revive growth

I. Q4 GDP Plunge: From Accommodation to Balance-Sheet 

IA. Not a Shock, a Signal: Context Before the Q4 GDP Collapse 

Several things must be established before discussing the jarring drop in Philippine economic performance to 3.0% in Q4 2025 and 4.4% for full-year 2025. 

This was not an isolated surprise. Q3 2025 GDP was revised downward from 4.0% to 3.0%, retroactively weakening what was already a soft quarter. 

Q4 then arrived as yet another "shocker," printing well below consensus estimates clustered around 4.0–4.2%, mirroring forecasting failures seen repeatedly at major inflection points.

IB. Policy Accommodation Without Growth 

The slowdown occurred despite aggressive policy accommodation.

Figure 1

Since mid-2024, the BSP has clearly shifted toward easing. Policy rates were reduced cumulatively, reserve requirements were cut sharply, and bank deposit insurance coverage was doubled — all measures explicitly designed to support liquidity, stabilize the banking system, and revive credit transmission. At the same time, fiscal deficits returned to near-pandemic magnitudes. (Figure1, upper window) 

Yet growth continued to deteriorate. 

This divergence between policy stimulus and economic outcome is the central puzzle that headline narratives avoid. 

IC. From Accommodation to Balance-Sheet Stress: The Currency Signal 

The divergence between aggressive policy accommodation and deteriorating growth did not remain abstract. It surfaced explicitly in the monetary data. 

In December, currency in circulation/currency issuance surged by a staggering 17.7% year-on-year (YoY), marking the largest net increase in peso issuance on record, exceeding even the BSP’s pandemic-era liquidity response in 2020! (Figure 1 lower chart) 

Importantly, this spike occurred on top of an already elevated currency base, pushing the peso stock to a new structural high rather than merely reflecting a low base effect. 

This was not a seasonal cash phenomenon. Nor was it demand-driven. The surge coincided with GDP growth slowing to 3.0%, rising bond yields, and mounting evidence of balance-sheet strain across the financial system. 

In past cycles, expansions of this magnitude occurred only under acute stress conditions. 

The mechanics matter. 

By late 2025, banks had absorbed unprecedented government duration. Net claims on the central government (NCoCG) rose 11% year-on-year to a record Php 5.888 trillion (as of November 2025), while hold-to-maturity securities (HTM) climbed to Php 4.077 trillion, locking balance sheets into long-dated, illiquid assets amid a rising yield environment.

Figure 2 

Liquidity buffers have been deteriorating quietly for years: cash-to-deposit ratios have fallen to all-time lows, while liquid-assets-to-deposit ratios have retraced to levels last seen during the 2020 pandemic stress episode. (Figure 2, topmost pane) 

December exposed the constraint. Liabilities to other depository corporations (ODC) collapsed by 35.5%, consistent with banks drawing down reserves toward effective reserve-requirement limits, while BSP bills outstanding declined sharply, signaling that banks were no longer willing or able to park liquidity even in short-term central bank instruments. With reserves and bills exhausted, liquidity preference shifted toward base money.  (Figure 2, middle image) 

The BSP accommodated this shift through record currency issuance, not to stimulate demand, but to prevent funding and settlement stress. This was not FX-driven monetization: headline reserve stability or international reserves was supported largely by gold valuation effects, foreign investments declined, and net foreign assets rose only modestly and liability-heavy. Peso liquidity creation occurred domestically, as a balance-sheet response to system-level strain. 

The Philippine treasury yield curve confirms the diagnosis. A bearish flattening from the front to the belly, alongside rising long-end yields, indicates tightening financial conditions despite liquidity injection. Monetary accommodation failed to translate into easier credit or stronger activity; instead, it morphed into defensive liquidity provision. 

In this context, the record surge in currency issuance was not an anomaly — it was a signal. Policy support did not revive growth because it was absorbed by balance-sheet repair, fiscal absorption, and liquidity preservation rather than by new consumption or productive investment. 

ID. Debt-Financed Growth: When GDP Expansion Is Fully Absorbed by the State 

2025 underscored the MOST critical — and least acknowledged — feature of recent Philippine GDP growth: its dependence on public debt expansion. 

Public debt rose 10.32% year-on-year, increasing by Php 1.656 trillion from Php 16.051 trillion to a record Php 17.71 trillion. 

Over the same period, nominal GDP (NGDP) increased by Php1.568 trillion, rising from Php 26.224 trillion in 2024 to Php 28.014 trillion, while real GDP expanded (RGDP) by just Php 979.5 billion, from Php22.244 trillion to Php23.223 trillion. (Figure 2, lowest diagram) 

Outside of the pandemic recession, this marks the first instance in modern Philippine data where the net increase in public debt EXCEEDED the net increase in nominal GDP. Put differently, the entirety of net economic expansion was fully matched — and slightly surpassed — by new government borrowing, even before accounting for private-sector leverage. 

This distinction matters. Conventional debt-to-GDP metrics obscure the underlying dynamic because deficit-financed spending has become the primary driver of GDP itself. In such a regime, rising debt ratios no longer merely reflect cyclical stimulus; they signal structural centralization of economic activity, where incremental growth accrues increasingly to the public sector while private balance sheets stagnate or retrench.

Figure 3

Consistent with this shift, the public debt-to-GDP ratio climbed sharply from 60.7% in 2024 to 63.2% in 2025, the highest level since 2005. Rather than indicating temporary countercyclical support, the data point to a growth model in which more government activity SUBSTITUTES for — rather than catalyzes — private-sector expansion. (Figure 3, topmost graph) 

GDP rose. But balance-sheet healing did not. 

IE. Liquidity Without Output: January CPI as Leakage 

January’s 2% CPI (inflation) print should not be read as a demand revival. It is better understood as liquidity leakage — the price-level consequence of record peso issuance interacting with constrained supply, weak productivity, and balance-sheet stress. 

Following the BSP’s late-2025 liquidity surge — coinciding with record currency issuance and a historic USDPHP depreciation — headline CPI rose to 2.0%, officially attributed to rents and utilities. This attribution is revealing rather than exculpatory. Housing costs and regulated utilities are precisely the sectors most sensitive to excess liquidity, FX pass-through, and policy-mediated pricing, not organic demand strength. (Figure 3, middle visual) 

Crucially, this inflation impulse arrived without a corresponding expansion in real output or household purchasing power. As shown earlier, the net increase in GDP was fully absorbed by public debt expansion, leaving little room for private-sector income growth. Liquidity thus surfaced not as consumption-led growth, but as cost pressure, disproportionately borne by middle- and lower-income households. 

The electricity sector provides a concrete transmission channel. With real electricity GDP already in recession, policy interventions — including RPT accommodations, GEA-mandated pass-throughs, and the SMC–AEV–Meralco restructuring framework — function as cash-flow stabilizers rather than demand enhancers. These mechanisms preserve operator solvency and bank exposures, but shift cost burdens downstream to consumers through tariffs and ancillary charges, reinforcing CPI pressures even as physical demand stagnates. 

This dynamic helps explain why January CPI firmed despite weakening household fundamentals. Inflation, in this context, is not a sign of overheating. It is a symptom of liquidity misallocation — money created and absorbed within balance-sheet and regulated sectors, leaking into prices without generating commensurate output, productivity, or wage gains. 

IF. Labor Market Confirmation, Not Contradiction 

Employment data reinforce — rather than offset — this interpretation. 

While December’s month-on-month employment figures showed little change, employment rates declined from 96.2% in Q3 to 95.6% in Q4, consistent with the multi-year deceleration in per-capita consumption. (Figure 3, lowest image) 

Headline labor statistics obscure deeper structural weaknesses: persistently high functional illiteracy, declining educational proficiency from Grades 3 to 12, and deteriorating job quality limit productivity and suppress real income growth. 

In this environment, modest inflation increases translate rapidly into real income compression, particularly for households with limited bargaining power and high exposure to food, rent, utilities, and transport costs.

Figure 4

Record USDPHP levels amplify these pressures through import costs and energy pricing, while liquidity-driven CPI erodes purchasing power faster than nominal wages adjust. (Figure 4, topmost pane) 

The result is a stagflationary configuration: prices rising modestly but persistently, employment participation softening at the margin, and real household resilience deteriorating beneath superficially stable aggregates. 

December’s employment data thus serve as validation, not a counterweight, to the inflation signal. 

II. Why Institutions Miss Turning Points 

This section consolidates four commonly treated as separate problems — peso-denominated GDP misreading, consensus forecasting failure, the credit-growth paradox, and principal–agent distortions — into a single institutional explanation for why macro turning points are repeatedly missed. 

The repeated failure to anticipate — or even recognize — macro turning points is not accidental. It reflects structural blind spots embedded in both the data emphasized and the incentives governing their interpretation. 

Public discourse fixates on percentage growth rates while neglecting peso-denominated GDP levels and trends, obscuring the extent to which recent expansions have been driven by base effects, debt-financed activity, and balance-sheet repair rather than organic demand. (Figure 4, middle chart) 

When nominal output growth is examined alongside credit expansion, the disconnect becomes apparent: leverage rose, liquidity expanded, yet final demand and productive investment failed to follow. 

This disconnect exposes a deeper institutional bias. Credit growth, in nominal terms, remained brisk and at record levels — but the spending it should have financed never materialized. The most plausible explanation is not an acceleration of consumption or investment, but refinancing, rollover activity, and balance-sheet preservation among already leveraged borrowers. Credit existed, but it circulated within the financial system rather than transmitting to the real economy. 

Forecasting errors at major inflection points flow naturally from this framework. Consensus projections cluster safely around official targets because institutional managers optimize for career safety, benchmark adherence, and signaling compliance, not for early or accurate macroeconomic diagnosis. Being conventionally wrong is less costly than being unconventionally right — a dynamic John Maynard Keynes captured succinctly when he observed that "worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." 

These principal–agent distortions ensure that warning signals — peso GDP deceleration, debt absorption, liquidity hoarding, and declining multipliers — are downplayed until they can no longer be ignored. By then, the slowdown is framed as an exogenous shock rather than the predictable outcome of accumulated imbalances. 

IIA. The Jobs and Poverty Paradox 

Paradoxically, authorities took a victory lap, citing exceeded targets in job creation and poverty reduction for 2025. 

Weakening GDP growth, rising balance-sheet leverage, and persistent price pressures are difficult to reconcile with a sustained expansion in employment. Slower output growth constrains firms’ revenue expectations, higher leverage limits risk-taking and new hiring, and elevated input costs compress margins. Together, these dynamics weaken the incentive and capacity of firms to add jobs. 

If one or all of these forces are magnified in 2026, the economy risks shifting from a cyclical slowdown to a more structural drag: employment growth could decelerate, informalization may rise, and productivity-enhancing investment could be deferred as firms prioritize liquidity preservation over expansion. 

Additional regulatory pressures—such as higher minimum wages—would further complicate this adjustment, particularly for MSMEs, which account for the bulk of employment. For smaller firms with limited pricing power and thin margins, higher labor costs may translate into slower hiring, reduced hours, or a shift toward informal labor, rather than higher real incomes or improved job quality. 

Once again, these dynamics are even harder to reconcile with persistently high functional illiteracy and mounting evidence of declining educational proficiency among Filipino learners from Grades 3 to 12. Weak human capital outcomes constrain labor productivity and employability, limiting the economy’s capacity to generate higher-quality jobs even in periods of credit expansion. 

They are equally difficult to square with surveys that continue to report elevated self-rated poverty and hunger, notwithstanding modest improvements in Q4 2025. (Figure 4, lowest images) 

Such indicators tend to lag headline growth and are highly sensitive to inflation, labor market quality, and household debt servicing costs. 

As economic pressures intensify, these measures are more likely to deteriorate than improve. A slowing economy does not remain an abstract macro concept; it ultimately surfaces in household balance sheets—through weaker income growth, reduced job security, higher debt burdens, and diminished resilience to shocks. 

IIB. Corruption as Symptom, Not Cause 

Public discourse has instead fixated on a simplistic (black and white) equation: corruption equals low GDP equals economic paralysis. 

Moral signaling may sound persuasive, but it confuses symptoms for causes.

Figure 5

Even the Philippine Statistics Authority (PSA) chart shows that recently exposed corruption scandals, including those linked to flood-control projects, merely accelerated a slowdown already underway. The deceleration began after the BSP’s banking-system rescue in 2021, with pronounced deterioration starting in Q2 2023 and intensifying over the last two quarters. (Figure 5, topmost visual) 

IIC. Public Spending Held Up — It Was Construction That Slumped, and Households That Broke 

Yes, real government final consumption expenditure (GFCE) slowed sequentially—from 8.7% in Q2 to 5.8% in Q3 and 3.7% in Q4, marking its weakest pace since early 2024. 

Still, full-year 2025 real GFCE expanded by 9.1%, far outpacing 2024’s 7.3%. Consequently, government spending’s share of GDP rose from 14.5% in 2024 to 15.1% in 2025, equaling its 2020 level and approaching the 2021 peak of 15.3%. 

In short, public spending was not cut—it increased. 

The collapse occurred in government construction. The sector contracted for three consecutive quarters in 2025, effectively entering a recession (Q2: –8.2%, Q3: –26.2%, Q4: –41.9%). (Figure 5, middle image) 

The downturn began in Q2 amid election-related spending restrictions and was compounded by the flood control scandal. For the full year, government construction shrank by 17.9%, pulling its share of real GDP down to 4.73% from a record 6.02% in 2024—still above pre-pandemic levels, but a sharp reversal nonetheless. 

However, real government spending and construction together accounted for 19.8% of GDP in 2025—roughly one-fifth—only slightly below the record 20.5% reached in 2024 and 2021. 

This indicates that the government’s drag on GDP stemmed largely from disruptions to ‘Build Better More’ projects rather than from an overall retrenchment in public spending. However, this was not the most pivotal factor behind the broader slowdown. 

The weakest link was households. 

Once government absorption rises and construction volatility disrupts income channels, households become the residual shock absorber 

IID. Crowding Out and the Long Decline of Household Consumption 

The rising share of government final consumption expenditure (GFCE) in GDP since 2005 has coincided with a persistent decline in household consumption’s share, pointing to a long-running crowding-out of private demand. 

Household consumption peaked at 78.6% of GDP in 2003 and has since trended steadily lower, falling to 72.6% in 2025—among the weakest readings on record, comparable only to 2019 and 2024.

Figure 6

In 2025, household consumption per capita growth slowed to 3.7%, its weakest pace since 2021, when the BSP mounted a historic rescue of the banking system. This deceleration pulled per capita GDP growth down to 3.5%, the lowest since 2011. (Figure 6, topmost window) 

However, per capita metrics mask distributional realities: income and consumption gains have been concentrated among higher-income households, while lower-income groups continue to bear the brunt of inflation, weak job quality, and rising debt burdens. 

The crackdown on flood control corruption could have reverberated across its extensive network of contractors, workers, and local beneficiaries, interrupting income streams and further weighing on household consumption, with the ongoing scandal acting as an accelerant to already-existing demand weakness. 

III. Select GDP Highlights

IIIA. Industrial Stress: Electricity GDP Enters Recession, Policy Scaffolding: Stabilizing Cash Flows, Not Demand

The slowdown is no longer confined to households or government spending. Real electricity GDP has slipped into a recession, a development last observed during the pandemic in Q2–Q3 2020, pointing to deeper industrial weakness. 

After stagnating in Q2, electricity GDP contracted by -1.1% in Q3 2025, worsening to -2.5% in Q4—notably a quarter that is typically strong for consumption. The sector has been in a persistent downtrend since peaking in Q2 2024. (Figure 6, middle chart) 

For the full year 2025, electricity GDP declined by -0.4% and accounted for 81.1% of the Electricity, Steam, Water, and Waste Management sector. 

This two-quarter contraction helps contextualize the extraordinary policy and quasi-fiscal support now directed at the sector. Direct and indirect interventions—including the SMC–AEV–MER transaction, RPT suspensions, and GEA-mandated rate increases passed on to consumers—function as income transfers that stabilize sector cash flows, particularly in favor of renewable energy operators, rather than reflecting underlying demand recovery. 

IIIB. Export Strength Without Domestic Production; External Demand Masks Weak Domestic Absorption 

The national accounts display growing internal inconsistencies. 

Real manufacturing GDP was effectively stagnant in Q3 (+1.3%) and Q4 (+1.6%), even as goods exports surged by 11.6% and 22.8%, respectively. The magnitude of export growth is too large to be explained by foreign-exchange translation or pricing effects alone. Re-exports offer only a partial explanation, as available PSA data do not indicate volumes sufficient to reconcile the gap. (Figure 6, lowest graph) 

The more plausible interpretation is a decoupling between export values and domestic manufacturing value-added, weakening GDP multipliers and masking industrial stagnation. 

This divergence is reinforced by the external accounts. Real exports of goods and services rose 13.2% in Q4, while imports increased by just 3.5%, signaling subdued domestic absorption. 

Export performance continues to support headline GDP, but with limited spillovers into domestic production, employment, or investment. 

IIIC. Trade Expansion Signals Supply-Side Outgrowth; Real Estate Growth Amid Record Vacancies

Figure 7

Despite softening household consumption, real trade GDP expanded by 4.6%, indicating supply-side outgrowth rather than demand-led expansion. This pattern raises the risk of excess capacity, inventory accumulation, and future pricing pressure, particularly in sectors already facing weak end-user demand. 

The real estate sector further illustrates the disconnect between GDP and market fundamentals. Real estate GDP expanded by 4.5%, despite only marginal improvements in occupancy and persistently elevated vacancy rates. 

In a functioning market, excess supply should constrain prices and turnover. The observed growth instead reflects construction pipelines, valuation effects, and policy or regulatory support, rather than successful absorption or improved affordability. 

IIID. Financial Sector Expansion Through Refinancing and Forbearance 

Financial sector growth follows the same logic. Financials expanded by 5.6%, led by banking and insurance, even as both consumers and producers remain under strain. This expansion reflects refinancing activity, loan restructurings, fee income, and margin preservation, aided by regulatory forbearance and delayed loss recognition, rather than new credit formation or productive risk-taking. 

IIIE. The Core Contradiction: GDP Without Balance-Sheet Healing 

The central question is unavoidable: if both consumers and producers are under pressure, how are large-ticket transactions being sustained? 

Elevated vacancy rates should translate into slower real estate turnover and rising credit stress. The absence of immediate deterioration suggests activity is being propped up by refinancing, balance-sheet rollovers, and accounting smoothing, masking underlying fragility rather than resolving it. 

Taken together, these dynamics point to an economy where headline GDP is increasingly supported by intermediation, policy scaffolding, and financial engineering, while final demand and productive capacity continue to weaken beneath the surface. 

IV. Political Economy as Verdict, Not Sidebar 

IVA. Entrenchment, Not Episodic Failure 

Survey data reinforce what the macro data already imply. When 94% of respondents describe corruption as widespread, the issue is not episodic misconduct but institutional entrenchment. “Widespread” denotes a system that reproduces itself, not isolated moral lapses. 

Recent high-profile cases — including the deportation of a foreign vlogger whose jailhouse documentation led to the dismissal of senior Bureau of Immigration officials — are not aberrations. They are visible manifestations of an underlying structure in which accountability is reactive, selective, and rarely preventative. 

IVB. The Political Economy Loop 

At the core lies a self-reinforcing political economy loop characteristic of ochlocratic, distribution-driven governance: 

• Ballots confer control.
• Control enables financing.
• Financing incentivizes intervention.
• Intervention multiplies dysfunction.
• Rinse. Repeat. 

Attempts to ‘depoliticize’ aid distribution miss the structural point. Someone must still execute these programs. Congress appropriates. Bureaucracies implement. Local political actors remain embedded throughout the chain (directly or indirectly), as the flood-control scandal illustrates. 

This loop explains why fiscal expansion, liquidity provision, and bailout mechanisms persist even as their growth efficacy declines. 

Intervention becomes politically necessary not because it works, but because it sustains the system that authorizes it. 

IVC. Conclusion Spending as Sacred — Cost as Afterthought 

Public spending is no longer treated as a policy choice subject to trade-offs, but as a sacred act insulated from cost scrutiny. 

Authorities now project Php 1.4 billion in Q1 2026 ‘pump-priming’ to support GDP growth, while the enacted 2026 budget has expanded to Php 6.793 trillion, a 7.4% increase over 2025—reinforcing the primacy of scale over efficiency.

What remains conspicuously absent from the discussion is the cost — and the bearer of that cost. 

Recent energy bailout-style interventions — including RPT accommodations, GEA-mandated transfers, and the SMC–AEV–Meralco restructuring framework — function less as growth support than as liquidity bridges. They shift duration and cash-flow risk away from stressed operators and onto banks, consumers, and quasi-public balance sheets, reinforcing the same liquidity pressures already visible in the monetary and inflation data. 

This pattern is not accidental. It reflects an embedded policy ideology, inherited from social-democratic institutional frameworks, that equates economic progress with centralization, scale, and administrative control. In such a regime, intervention becomes the default response to stress, while decentralization, market clearing, and balance-sheet discipline are treated as politically risky or socially unacceptable. 

As a result, genuine market reform is perpetually deferred. Losses are smoothed rather than resolved, costs are socialized rather than priced, and liquidity is injected to preserve stability rather than to restore productivity. The system survives quarter to quarter — but at the expense of private-sector dynamism, household resilience, and long-term growth capacity. 

In this context, slowing GDP, rising debt, tariff pass-throughs, and household strain are not isolated policy failures. They are the logical endgame of an entrenched framework in which spending is reflexive, cost is displaced, and growth is increasingly measured by activity sustained rather than value created. 

What emerges is an unsustainable equilibrium: centralization replaces discipline, coercive redistribution substitutes for price signals, and policy-induced malinvestment is perpetuated in the name of stability — until the system ultimately fails on the very contradictions it suppresses. 

Crisis, under such conditions, is not a shock — it is the system’s resolution. 

____

Selected References 

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025 

Prudent Investor Newsletters, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 07, 2025 

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 202 

Prudent Investor Newsletters, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t, Substack, November 16, 2025