As the cycle nears its end, a country is typically beset
by chronic fiscal deficits. Low domestic savings and current account deficits
render it dependent on foreign lenders. As lenders become wary, the average
maturity of the public debt shortens. The central bank finds it impossible to
set interest rates at the level which balances the needs of both creditors and
borrowers. Once interest rates rise, governments’ debt servicing costs become
increasingly onerous. Government finances come to resemble a Ponzi scheme, with
new debt being issued to service old borrowing—Edward Chancellor
In this issue
The CMEPA Delusion: How Fallacious Arguments Conceal the
Risk of Systemic Blowback
I. Introduction: Evading the Real Issue
II. The Fallacies Behind the CMEPA’s Defense
A. False Equivalence
B. Red Herring
C. Categorical Error
D. Begging the Question
E. Ignoring Second-Order Effects (Bastiat’s “Seen and
Unseen”)
F. Appeal to the General (Overgeneralization)
III. The Diminishing Role of Time and Savings Deposits in
M2 and Bank Liabilities
IV. Defective Gross Domestic Savings, Near Record
Savings-Investment Gap
V. Financing the ‘Twin Deficits’ with Record Systemic
Leverage
VI. State-Driven Financial Repression: Time Deposits vs.
RTBs & Pag-IBIG MP2
VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s
Den
VIII. Conclusion: Sovereignty over Speculation, Economic
Blowback
The CMEPA Delusion: How Fallacious Arguments Conceal the
Risk of Systemic Blowback
Logical
fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they
obscure financial repression and pave the way for systemic economic backlash.
This is a
follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA
as Financial Repression by Design
I. Introduction: Evading the Real Issue
The Capital
Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not
merely because of its tax provisions but because of what it signals about the
evolving relationship between the state and citizen savings.
While defenders
of CMEPA claim it merely modernizes financial taxation and expands savings
options, these arguments often rest on flawed logic and misleading
equivalencies that mask the deeper issues: the erosion of true savings, the
rise of speculation, and creeping state control over private capital.
Besides, in
classical economic thought, savings is deferred consumption—a temporal
anchor against uncertainty, a moral wager on future stability. Time-bound,
low-risk instruments like term deposits have long served this function. They do
not aspire; they buffer. When the state flattens the tax incentives
protecting this buffer, it doesn’t merely tweak an equation—it alters the
meaning of saving.
II. The Fallacies Behind the CMEPA’s Defense
CMEPA's
defenders lean on several logical fallacies to support their case:
A. False Equivalence: By equating time-bound
savings with speculative financial assets such as stocks or REITs, proponents confuse
two fundamentally different financial behaviors. Savings are deferred
consumption; risk assets are bets on volatility.
B. Red Herring: Arguments
pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail
Treasury Bonds distract from the core concern: CMEPA disincentivizes
bank-based, low-risk savings that traditionally fund long-term development.
C. Categorical Error:
To assume that financial markets can substitute for savings systems ignores
the institutional role of savings in capital formation, stability, and
intermediation.
D. Begging the Question: CMEPA defenders
assume what they must prove: that taxed savings instruments still count as
savings (tax = savings or 1-1=2), or that savings will simply shift
outside time deposits without consequence. This begs the question.
It presumes that
risk assets and government-managed schemes are natural substitutes for
time deposits. It conflates taxation with neutrality, ignoring how
incentives shape behavior.
In reality, aside
from extraction, tax is a signal, not a passive overlay. And when the
signal penalizes duration, it redefines savings itself.
Worst, it also treats
financial repression as benign without examining its structural damage to
intermediation, capital formation, and systemic liquidity.
E. Ignoring Second-Order Effects (Bastiat’s “Seen and
Unseen”)
Defenders
highlight only the seen—that capital might shift to “alternative”
instruments like stocks or Pag-IBIG MP2.
What is seen:
1. Lower taxes
on REITs and stocks = more investment.
2. Flat tax on
deposits = not new, fairness
But they ignore
the unseen:
1. weakening
of bank intermediation via the erosion of long-term bank funding,
2. The crowding
out of private credit channels, and
3. The behavioral
shift toward liquidity-chasing speculation, which gives rise to
4. increased market and economic volatility
Policy must be
judged not just by its immediate effects, but by its downstream damage.
This is the classic Bastiat fallacy—what is unseen—the fragility, the
distortion, the systemic cost—often matters more.
F. Appeal to the General (Overgeneralization)
CMEPA’s
defenders argue that because some financial instruments like stocks, REITs, or
Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for
traditional savings.
But this overlooks
key details: liquidity risk, volatility, transitional frictions
or tensions, accessibility, ceilings, investor profile and behavioral inertia
that constrain real-world reallocation.
Not all
instruments serve the same function—especially for households that need
capital preservation over yield.
This fallacy
blurs crucial distinctions between risk assets and true savings vehicles. By
appealing to broad categories, it sidesteps the very real limitations and risks
of reallocating savings. In policy, the details are the difference
between resilience and fragility.
Policy design
and evaluation demands specificity: Without disaggregated data on household
savings patterns, bank funding structures, and instrument uptake, differentiating
between resilience and fragility, the defense becomes narrative and rhetoric, not
analysis.
III. The Diminishing Role of Time and Savings Deposits in
M2 and Bank Liabilities
Since the BSP’s
structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have
steadily declined.
This erosion has
profound implications for the liquidity foundations of the Philippine financial
system.
Figure 1 Notably, time
deposits briefly surged during two critical junctures: first, when the BSP’s
policy rates hit record lows during the pandemic, and again when aggressive
rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1,
topmost pane)
Subsequent M2
growth increasingly leaned on more liquid components—such as demand deposits
and currency in circulation—rather than long-term savings.
In effect,
liquidity transformation has shifted away from stable deposits
toward more volatile sources: demand-driven credit expansion and the banking
system’s financing of government liabilities, as evidenced by the surge in
net claims on the central government (NCoCG). (Figure 1, middle graph)
The CMEPA
tax will likely accelerate this liquidity vacuum by further penalizing
traditional savings vehicles.
This structural
shift presents a systemic challenge. As deposits decline, credit expansion
becomes increasingly unanchored from genuine savings. In tandem with both
implicit liquidity support (via bank balance sheets) and direct quantitative
easing (via the BSP), this dynamic becomes inherently inflationary and
destabilizing.
The dilemma is mirrored
in bank balance sheets.
The time deposit share of total bank liabilities
has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before
rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest
diagram)
This plunge coincides
with a decade of financial repression: persistently low real rates, high
inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA
accounts.
As traditional
deposits dwindled, banks turned increasingly to borrowings to fill the
liability gap.
The share of
bank borrowings from capital markets has been rising since 2015, ironically
peaking just before the pandemic recession in 2019. This share temporarily
declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in.
Yet as liquidity
stress intensified, bank borrowing surged anew—hitting 7.9% in March
2025—before moderating after the BSP’s second leg of RRR cuts.
In this context,
what CMEPA promotes as capital market reform in practice amounts to an escalation
of the erosion of the deposit base. It trades long-term stability
for short-term borrowing, redirecting household savings away from private
financial intermediation and into state debt.
The result? A more
fragile banking system, less private capital formation, and greater
macro-financial risk.
Moreover, these
bank borrowings now compete directly with government financing needs and
private sector credit demand—exacerbating the crowding-out effect and
tightening liquidity conditions for the broader economy.
This fragility
is amplified by the growing concentration of liquidity within a handful
of dominant players.
Figure 2As of May,
Philippine banks controlled 82% of total financial resources
or assets, with universal-commercial banks accounting for 76%. (Figure 2,
topmost image)
Meanwhile, even
as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2%
in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP
become dependent on liquidity, but, importantly, money creation is no longer
translating into real economic or savings growth. (Figure 2, middle chart)
Taken together,
as banks increasingly monopolize liquidity while time deposits diminish, the
financial system becomes more fragile. It is precisely this growing
instability that forced the BSP to roll out confidence-boosting measures—including
the doubling of deposit insurance
coverage and the second phase of the RRR cut. These are not signs of
strength. They are signs of deepening systemic stress.
IV. Defective Gross Domestic Savings, Near Record
Savings-Investment Gap
At first glance,
gross domestic savings (GDS)
might seem useful for assessing national savings conditions, but its use to account
for real savings conditions is generally misleading.
First, as a derived
indicator—not a strict accounting identity—it suffers from definitional
inconsistency.
For instance,
the World Bank reports it at 9.3% in 2024,
while Trading Economics, citing the same source, shows 29.24%. Same
source, vastly different realities. (Figure 2, lowest window)
Second, it is
calculated as:
GDS = GDP –
Total Consumption (private + public).
But GDP itself
is indifferent to distributional nuances. As we always ask here: Cui bono
or Who benefits?
Is the
savings outcome driven primarily by genuine productivity gains—or by increasing
dependence on leverage? What is the quality of the growth? What ratios of
cost, allocation, and extraction were involved?
Third, the GDS
measure masks household savings weakness—especially during capital flight
or high profit repatriation.
Fourth, how are
these "savings" reflected in the banking system?
Even when
elevated GDS suggests high aggregate capacity, the reality is that available
savings for productive intermediation—such as long-term deposits and investible
capital—are scarce. CMEPA threatens to worsen this distortion by tilting
incentives toward consumption and speculation.
Put differently:
while 2024 GDS appears deceptively high at over 29% of GDP, net national
savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank
estimates.
This reveals a
deep structural fragility in the country's true capacity to accumulate capital.
By penalizing savings and redirecting flows into speculative capital markets, CMEPA
threatens to widen this gap and exacerbate the very vulnerabilities
it claims to address.
Figure 3Yet—and this is
key—BusinessWorld recently
produced a chart based on Philippine Statistics Authority (PSA) data showing
the second widest gap between saving rates (apparently from the World
Bank) and investment rates —which we discussed last March.
(Figure 3, topmost visual)
If savings were
truly robust, why does this gap persist? What finances this chasm?
V. Financing the ‘Twin Deficits’ with Record Systemic
Leverage
Cherry-picking
numbers to defend the law ignores that the savings-investment gap has been manifested
through ‘twin deficits’—fiscal and external trade. Despite supposed
normalization post-pandemic, the Philippine economy remains at pandemic-level
dependency on credit. (Figure 3, middle graph)
Here’s the key: public
spending is part of those investment rates.
Bureau of the
Treasury data revealed that the 2025 first-half fiscal deficit
hit a record Php 765.49 billion—even without a recession!
This confirms earlier warnings, which
we’ll expand on in another post. (Figure 3, lowest diagram)
So, who finances
this? Domestic banks and foreign lenders are now absorbing this growing
imbalance.
As previously
noted:
"A
shrinking domestic savings pool limits capital accumulation, increases
dependence on external financing, and exposes the economy to risks such as debt
distress and currency fluctuations."— Prudent Investor, March 2025
Figure 4As of May, public
debt hit a record Php 16.918 trillion, with June data expected to
breach Php 17 trillion —the all-time high deficit
will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%?
(Figure 4, upper graph)
Meanwhile,
combined with total bank credit expansion, systemic leverage reached a
new record of Php 31.225 trillion, or 118% of 2024 nominal GDP.
(Figure 4, lower chart)
And that figure excludes:
- Capital market
debt issuance (corporate bonds, CMBS)
- FDI-linked
intercompany loans
- Informal debt
(pawnshops, personal lending, unregulated finance)
Think of the
costs: this credit buildup means rising debt servicing burdens, declining real
incomes, and growing risks of delinquencies and defaults.
More
importantly, in the absence of productivity-led savings growth, the
Philippine economy is running on borrowed money—and borrowed time.
VI. State-Driven Financial Repression: Time Deposits vs.
RTBs & Pag-IBIG MP2
Defenders of
CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for
taxed time deposits.
But these are neither
comprehensive nor scalable:
MP2 has annual
ceilings and requires Pag-IBIG membership.
RTBs are
state-managed, episodic, and offer limited liquidity.
Figure 5 Latest BSP
data: (Figure/Table 5)
- Total time
deposits in the PH banking system: Over Php 5 trillion
- Long-term
deposits (>5 years): ~Php 500–Php 700 billion
- RTB retail
uptake: ~Php 175 billion
- MP2 inflows: ~Php
30–Php 50 billion/year
Combined, RTBs
+ MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of
tax incentives. The rest sits idle, chases risk, or exits the formal system.
More critically,
these instruments are not substitutes for a diverse, open savings
ecosystem. They represent state-controlled pipelines—a form of financial
repression where household capital is diverted into funding public
consumption, and paid for by the diminishing purchasing power of the peso.
And this is supposed to ‘encourage’ savings growth? Really?
This contradicts
the narrative that these flows remain as ‘savings outside’ time deposits. On
the contrary, it is a narrowing of financial autonomy.
VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s
Den
As previously
discussed, the policy-induced gambling mentality has migrated to the
equity markets. Instead of encouraging true savings, CMEPA will foster
boom-bust cycles that further erode wealth and fuel capital consumption.
This week’s
coordinated pre-closing and afternoon pumps illustrate how
institution-dominated markets manage the main index for optics—what we might
call "benchmark-ism." (Figure 5, lower graph)
Though it escapes the Overton Window, this behavior—like CMEPA—distorts the
price signal function of capital markets, leading to the misallocation of
capital goods in the economy.
By stoking
gambling instincts, markets become casinos where savings and credit—someone
else’s savings or bank-issued liquidity—is converted into house profits.
When capital
markets are manipulated for non-market goals, the effect is the same: momentum
cloaking a wealth transfer.
CMEPA leads
savers straight into the lion’s den.
VIII. Conclusion: Sovereignty over Speculation, Economic
Blowback
In an age where
reform rewards liquidity and penalizes patience, true saving becomes a
philosophical—and revolutionary—act. It’s no longer just economic prudence.
It’s resistance to engineered ephemerality.
The ideology
driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant.
Be taxable. Be subservient to the state.
The public must
reply: Be steady. Be real. Be cautious. And above all—be sovereign.
This is
not academic critique—it’s a warning. When incentives distort prudence, the
fallout is material, not theoretical.
CMEPA does
not act alone. It fuses with a wider architecture of distortion:
- BSP’s
redistributionist easing cycle
- Record deficit
spending
- An implicit
USDPHP soft peg
- Accelerating
bureaucratization and economic centralization
Together,
they form the scaffolding of financial and social maladjustment.
And when crises
surface—households hemorrhaging stability, banks scrambling for duration,
systems unraveling under engineered fragility—the reckoning will be felt
everywhere.
In that moment, accountability
will matter.
We must
remember: Who authored this distortion? Who rationalized it as progress?
And we
must prepare—for its backlash.
___
References
Prudent Investor
Newsletter, 2024’s Savings-Investment Gap Reaches
Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls
March 9, 2025, Substack
