Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility

 

Credit Expansion No Substitute for Capital. These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit expansion and inflation, euphemistically called an "easy money policy"—Ludwig von Mises 

In this issue

Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility

I. Challenging the BSP’s Easing Cycle Narrative

II. How BSP’s Credit Card Subsidies Materially Transformed Banking Business Model

III. Bank Lending to Real Estate Expanded in 2024, Even as Sector’s GDP Slumped to All-Time Lows!

IV. Credit Intensity Hits Second-Highest Levels!

V. Redux: The Debt-to-GDP Myth: A Background

VI. The GDP is Mostly About Debt: 2024 Public Debt-to-GDP Reaches Second Highest Level Since 2005!

VII. The Mirage of Labor Productivity

VIII. Conclusion 

Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility 

Universal-commercial bank lending performance in 2024 provides some critical insights. Combined with public debt and GDP, these reveal rising financial and economic fragilities. 

I. Challenging the BSP’s Easing Cycle Narrative 

Inquirer.net, February 13, 2025: "Bank lending posted its fastest growth in two years to cross the P13-trillion mark in December, as the start of the interest rate-cutting cycle and the typical surge in economic activities during the holiday season boosted both consumer and business demand for loans. Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that outstanding loans of big banks, excluding their lending with each other, expanded by 12.2 percent year-on-year to P13.14 trillion in the final month of 2024, beating the 11.1-percent growth in November. That was the briskest pace of credit growth since December 2022." 

While the BSP kept its policy rate unchanged this week, it has engaged in an 'easing cycle' following three rate cuts, a substantial RRR reduction, and possibly record government spending in 2024.

Figure 1

The notion that the BSP's easing cycle has driven bank lending growth is not supported by the data. While December saw the "briskest...since December 2022," the 13.54% growth rate in that earlier period occurred near the peak of a hiking cycle, suggesting that neither rate hikes nor cuts significantly influence growth rates.

Official rates peaked in October 2023, ten months after the December 2022 lending surge.

II. How BSP’s Credit Card Subsidies Materially Transformed Banking Business Model 

Unlike the BSP's 2018 interest rate cycle, where hikes coincided with falling bank lending rates, the current credit market anomalies likely reflect distortions caused by the BSP's pandemic-era policies. These included an interest rate cap on credit cards and various relief measures. (Figure 1, topmost image)

Specifically, the BSP's interest rate cap in September 2020 significantly reshaped or transformed the banking system's business model, demonstrably shifting focus from business to consumer loans. 

The consumer share of universal-commercial (UC) bank loans surged by 27.4% over four years, increasing from 9.5% in 2020 to 12.1% in 2024. (Figure 1, middle window)

The biggest segment growth came from credit cards and salary loans:

-Credit card loans grew at a 22.3% CAGR from 2020 to 2024, increasing their share from 4.6% to 7.1% of total loans. Since 2018, their share has more than doubled from 3.4% to 7.1%. (Figure 1, lowest graph)

-Salary loans grew at an 18.07% CAGR over the same period, expanding their share from 0.9% to 1.2%.

Figure 2

-December's month-on-month (MoM) growth of 3.38% marked the highest since January 2022's 3.98%. Contrary to the assumption of seasonality, the highest monthly growth rates have not been confined to the holiday season. (Figure 2, topmost diagram) 

This astronomical growth in consumer credit, further fueled by December's reacceleration, underscores the substantial leveraging of household balance sheets.  

III. Bank Lending to Real Estate Expanded in 2024, Even as Sector’s GDP Slumped to All-Time Lows! 

In 2024, real estate (Php 222.72 billion) and credit cards (Php 212.1 billion) saw the largest nominal increases in lending. Electricity and Gas, and trade, followed. (Figure 2, middle chart) 

Supply-side real estate loans accounted for 20.5% of total UC bank loans at year-end. This figure excludes consumer mortgage borrowing. 

However, while real estate's GDP share hit an all-time low of 5.4% in 2024, bank exposure to the sector reached its second-highest level. In Q3, BSP data revealed that real estate prices had entered deflationary territory. (Figure 2, lowest pane) 

The continued decline in the sector's GDP raises mounting risks for banks. 

Rising real estate loan growth does not necessarily indicate expansion but rather refinancing efforts or liquidity injections to prevent a surge in delinquencies and non-performing loans.

Figure 3

Moreover, key sectors benefiting from BSP’s rate policies—construction, trade, finance, and real estate—continue to represent a significant share of UC bank portfolios, which share of the GDP has also been rising, posing as systemic risk concerns. (Figure 3, topmost chart) 

IV. Credit Intensity Hits Second-Highest Levels!

A broader perspective reveals more concerning trends.

UC total bank loans grew by 10.8% year-on-year, from Php 11.392 trillion in 2023 to Php 12.81 trillion in 2024 (a net increase of Php 1.42 trillion). In comparison, nominal GDP grew by 8.7%, from Php 24.32 trillion to Php 26.44 trillion (a net increase of Php 2.12 trillion).

This gives a 'credit intensity' of Php 0.67—the amount of bank lending needed to generate one peso of GDP—the highest since 2019. This means UC bank lending has recovered to pre-pandemic levels, while GDP hasn't. 

Factoring in public debt (excluding guarantees), 2024 saw a sharp rise in credit dependency. Credit intensity from systemic debt (public debt + bank lending, excluding capital markets and shadow banking) reached its second-highest level ever, trailing only the peak of 2021. 

It now takes Php 1.35 of debt to generate one peso of GDP, highlighting diminishing returns of a debt-driven economy. (Figure 3, middle image) 

The mainstream thinks debt is a free lunch! 

V. Redux: The Debt-to-GDP Myth: A Background

The BSP’s trickle-down policies operate under an architectural framework called "inflation targeting."

Though its stated goal is to 'promote price stability conducive to balanced and sustainable growth of the economy,' it assumes that inflation can be contained or that the inflation genie can be kept under control.

Its easy money regime has been designed as an invisible tax or a form of financial repression—primarily to fund political boondoggles—by unleashing "animal spirits" through the stimulation of "aggregate demand" or GDP. At the same time, GDP growth is expected to increase tax collections. 

The fundamental problem is that the BSP has no control over the distribution of credit expansion within the economy. 

As it happened, while the "liberalized" consumer-related sectors were the primary beneficiaries, distortions accumulated—principally as the elites took advantage of cheap credit to pursue "build-it-and-they-will-come" projects. 

The result was the consolidation of firms within industries and the buildup of concentration risk. Soon, the cheap money landscape fueled the government’s appetite for greater control over the economy through deficit spending. 

Thus, the "debt-to-GDP" metric became the primary justification for expanding government spending and increasing economic centralization.

This race toward centralization through deficit spending intensified alongside the elite’s "build-it-and-they-will-come" projects during the pandemic.

VI. The GDP is Mostly About Debt: 2024 Public Debt-to-GDP Reaches Second Highest Level Since 2005!

Once again, the consensus has a fetish for interpreting debt-to-GDP as if it were an isolated or standalone factor. It isn’t.

In the recent past, they cited falling debt-to-GDP as a positive indicator. However, let’s clarify: since the economy is interconnected—one dynamic entwined with another, operating within a lattice of interrelated nodes—such a simplistic view is misleading.

When the BSP forced down rates to reinforce its "trickle-down" policies, the consequences extended beyond public spending, affecting overall credit conditions. This policy catalyzed a boom-bust cycle. 

As such, when the public debt-to-GDP declined between 2009 and 2019, it was primarily because bank credit-to-GDP filled most of the gap. 

The proof of the pudding is in the eating: systemic leverage-to-GDP remained range-bound throughout that decade. Debt was merely transferred or juggled from the public to the private sector. 

GDP growth, in large part, was debt-driven.

Yet, the pandemic-era bailout fueled a surge in both public debt-to-GDP and bank credit-to-GDP. Public debt-to-GDP (excluding guarantees) reached 60.72%—its second-highest level after 2022—following the BSP’s COVID-era bailout, which also marked the highest rate since 2005. 

It’s worth remembering that Thailand—the epicenter of the 1997-98 Asian Crisis—had the lowest debt-to-GDP at the time. (Figure 3, lowest table) 

More importantly, public debt has anchored government spending, which has played a crucial role in shaping Philippine GDP since 2016.

V. Systemic Leverage Soars to All-Time Highs! 

Figure 4

On a per capita basis, 2024 debt reached historic highs, increasing its share of per capita GDP (both in nominal and real terms). (Figure 4, topmost visual)

Simply put, rising debt levels have been eroding whatever residual productivity gains are left from the GDP. 

Alternatively, this serves as further proof that GDP is increasingly driven by debt at the expense of productivity. 

It also implies that the deepening exposure of output to credit is highlighting its mounting credit risk profile. 

In 2024, UC bank loans-to-GDP hit 48.5%, the second-highest since 2020 (49.7%), indicating crisis lending via easy money policies. 

Systemic leverage reached a record 109.2% of GDP, surpassing 2022 ATH. (Figure 4, middle chart) 

Despite a Q4 2024 liquidity spike (M3), consumers struggled; household GDP slowed, suggesting households are absorbing increasing leverage while enduring the erosion of purchasing power in the face of inflation. (Figure 4, lowest diagram)

Figure 5

Another point: The growth rate of systemic leverage has shown a strong correlation with the CPI since 2013. However, it appears to have deviated, as rising systemic leverage has yet to result in an accompanying increase in the CPI. Will this correlation hold? (Figure 5, topmost image) 

VI BSP’s ‘Trickle-Down Policies’ Steered a Credit Card and Salary Loans Boom (and coming Bust)

There is more to consider. The banking model's transformation toward consumers didn’t happen overnight; it was the result of cumulative easy money policies that intensified during the pandemic. 

Our central premise: while bank expansion fueled inflation, the pandemic-induced recession—marked by income loss—and, most notably, the BSP’s easy money emergency response (including historic interest rate and RRR cuts, various relief measures such as credit card subsidies, the USDPHP cap, and the unprecedented Php 2.3 billion BSP injections) sparked a consumer credit boom, which subsequently triggered the second wave of this inflation cycle. 

Though the BSP’s intent may have been to compensate for consumers' income losses in order to stabilize or protect the banking system, the economic reopening further stirred up consumers’ appetite for credit, fueling demand amid a recovering, fractured, and impaired supply chain. 

Debt-financed government spending also contributed to the surge in aggregate demand. Together, these factors spurred a rise in "too much money chasing too few goods" inflation. 

The inflation genie was unleashed—yet it was conveniently blamed by everyone on the "supply side." The underlying premise of the echo chamber was that the demand-supply curve had been broken!  Yet, they avoided addressing the question: How could a general price increase occur if the money supply remained stable? 

Ironically, the BSP calibrated its response to the inflation cycle by adjusting interest rates in line with its own interest rate cycle! In other words, they blamed supply-side issues while focusing their policies on demand. Remarkable! 

The BSP’s UC bank credit card and salary loan data provide evidence for all of this (Figure 5 middle and lowest graphs): the escalating buildup of household balance sheets in response to the loss of purchasing power, the CPI cycle, and the BSP and National Government’s free money policies.

Figure 6

It’s also no surprise that the oscillation of UC bank loan growth has mirrored fluctuations in the PSEi 30. (Figure 6, topmost window) 

Unfortunately, the law of diminishing returns has plagued the massive growth of consumer credit, leading to its divergence from consumer spending and PSEi 30 flows. 

As an aside, the upward spiral in cash in circulation last December and Q4 —reflecting both liquidity injections for the real estate industry and pre-mid-term election spending—likely points to higher inflation and the further erosion of consumer spending power. (Figure 6, middle chart) 

Is it any wonder that self-reported poverty ratings and hunger have surged to record highs? 

Does the path to 'middle-income status' for an economy translate into a population drowning in debt? 

VII. The Mirage of Labor Productivity

Businessworld, February 10, 2025: The country’s labor productivity — as measured by gross domestic product per person employed — grew by 4.5% year on year to P456,342 in 2024. This was faster than the 2.7% a year earlier and the fastest in seven years or since the 8.7% in 2017. (Figure 6, lowest image)

While this suggests improving efficiency, it fails to account for GDP’s deepening dependence on credit expansion. When growth is primarily debt-financed, productivity gains become illusory. 

Credit isn’t neutral. Its removal would cause the 'debt-driven GDP-labor productivity' 'castle in the sand' to crumble 

VIII. Conclusion  

The 2024 UC bank lending data reveals critical economic trends: 

>A structural shift in the banking business model, driven by the BSP’s inflation-targeting and pandemic rescue policies. 

>Mounting concentration risks due to industry consolidations and growing sector fragility.

>Public debt-to-GDP reaching its second-highest level since 2005, while systemic leverage has hit an all-time high.

Diminishing returns from the increasing dependence on systemic credit—bank expansion and public debt—highlighting the risks of financial and economic vulnerabilities and instability.

The Philippine political economy operates with a very thin or narrow margin for error.

In an upcoming issue, we are likely to address the banking system's 2024 income statement and balance sheets. 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

  

The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters—Ludwig von Mises 

In this issue

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction

II. January 2025 2.9% CPI: Key Highlights

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

IV. Baseline Changes: Engineering GDP Growth

V. The Falling Rice Prices: Why the Food Emergency Security?

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism

VII. Treasury Markets Are Already Telegraphing Inflation Risk

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices?

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction 

·         January’s CPI provided a temporary breather against the looming risk of an inflation rebound.

·         Despite falling rice prices, authorities pushed forward with a Food Security Emergency—one in a series of interventions aimed at suppressing CPI in the short term.

·         Meanwhile, rising domestic and external debt, coupled with declining foreign reserves (GIR), amplify risks of peso devaluation and feeding the inflation cycle.

II. January 2025 2.9% CPI: Key Highlights 

Businessworld, February 6, 2025: HEADLINE INFLATION remained steady in January as lower utility costs offset a spike in food prices, preliminary data from the Philippine Statistics Authority (PSA) showed. It also settled within the 2.5%-3.3% forecast from the Bangko Sentral ng Pilipinas (BSP). The January print was also slightly higher than the 2.8% median estimate in a BusinessWorld poll of 16 analysts... Core inflation, which discounts volatile prices of food and fuel, settled at 2.6% during the month — slower than 2.8% in December and 3.8% a year ago…On the other hand, rice inflation contracted to 2.3% in January from the 0.8% clip in December and 22.6% jump a year prior. (bold added) 

Nota Bene: As of January, the BSP has yet to release data on bank lending, liquidity conditions, and its central bank survey. This leaves us with the January CPI—interpreted through the lens of what the government intends to highlight: supply-driven inflation!

Figure 1 

Momentum: January’s data suggests stalling momentum in the year-over-year (YoY) change for both headline and core CPI. 

However, a trend analysis of the month-over-month (MoM) change reveals that while headline CPI remains above the upper boundary of its trend line, core CPI remains rangebound, albeit slightly lower than recent highs. (Figure 1, topmost image)

Bottoming Phase? These MoM rates suggest a bottoming phase. It remains uncertain whether this will remain rangebound or break to the upside, requiring further confirmation.

Uptrend of the Third Wave of the Inflation Cycle Intact. Nonetheless, the broader uptrend in the 10-year headline and core CPI remains intact. In fact, MoM trends reinforce the case for a bottoming—a potential launching pad.

It's important to remember that this CPI backdrop occurs amidst the BSP's pursuit of easy money policies since the second half of 2024. This is coupled with a series of all-time highs in bank credit expansion and a near-record unemployment rate in December 2024. (Figure 1, middle and lowest charts)

Figure 2

Level vs. Rate of Change. It is a misimpression to state that January's CPI is at the same level as December's. While the rate of change may be the same, the level is definitively not.

The Philippine Statistics Authority's (PSA) nominal prices determine the level, whereas the CPI figures represent the base-effect represented in percentages. (Figure 2, topmost graph)

The nominal rates also reveal the cumulative effects of the CPI. Even if growth rates stall or decrease (slow), the continued increase in general prices persists.

This leads to sustained hardship, especially for those living on the margins.

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

Authorities often employ self-serving attribution bias—crediting successes to internal factors while attributing failures to external ones—to explain economic phenomena. For instance, they attribute recent food price increases to 'typhoons/weather disturbances' or diseases like African Swine Fever.

The Philippines experiences an average of 20 typhoons annually. If the establishment's logic were consistently true, food prices should be perpetually elevated.

A review of the 10 worst typhoons to hit the country—events that, according to the establishment narrative, should have triggered inflation surges—shows little correlation with CPI spikes. In fact, food CPI exhibited a downtrend in seven of the nine years when these devastating typhoons occurred (the other two took place in 2020). (Figure 2, middle pane)

But, of course, the vulnerable public is expected to accept the official narrative without question—because the echo chamber insists on it!

IV. Baseline Changes: Engineering GDP Growth

Policymakers are always seeking ways to justify their free-lunch economic policies. 

Now, they are signaling a change in the baseline rates of the most sensitive data—particularly the CPI and the GDP—starting in 2026.

Inquirer.net, February 6, 2025: The Philippine Statistics Authority (PSA) will change again the base year used to calculate inflation and gross domestic product (GDP) so that key data could better capture the latest economic conditions.

This adjustment, while technical in nature, conveniently offers a tool for reshaping inflation narratives, making future price pressures appear more benign.

Well, if history serves as a guide, "could better capture the latest economic conditions" often implies adjusting baseline rates to lower the CPI. Comparing the CPI with an overlap of the 2006 and 2018 baselines reveals a significant difference, with the 2018 baseline showing a markedly lower CPI. (Figure 2, lowest diagram)

The BSP still publishes data series from 2000, 2006, 2012, and 2018.

Fundamentally, a high Nominal GDP (NGDP) when calculated against a reduced CPI (as a deflator or implicit price index) results in a HIGHER headline GDP! Voilà! A statistical boom! 

Will the Philippine government achieve its coveted "middle-income status" economy by inflating its statistics? 

V. The Falling Rice Prices: Why the Food Emergency Security?

Authorities also claim that "rice inflation contracted to 2.3% in January from the 0.8% clip in December." 

If this is the case, why the sudden need for a Food Emergency Security (FES) program, which includes light-handed price controls (a maximum Suggested Retail Price) and the release of the National Food Authority’s "buffer rice" or reserves?

Figure 3

If anything, these interventions have temporarily suppressed CPI in the short term. 

In any case, here is a timeline of political interventions in the food and agricultural industry, which should serve as template. 

February 15, 2019: GMA News: Duterte signs rice tariffication bill into law

March 11, 2020: DTI: Nationwide price freeze on basic necessities in effect amid COVID-19 emergency 

February 2, 2021: Inquirer: DA: Price ceiling on pork, chicken products to start on Feb. 8

April 8, 2021: Portcalls: Duterte signs EO lowering tariff for pork imports 

June 1 2024: DTI: DTI secures voluntary price freeze commitments for more basic necessities 

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Figure 3, topmost graph)

Ironically, the easing of interventions may have contributed to the decline in CPI from the end of 2022 to mid-2024. 

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism 

Price ceilings create artificial demand spikes. With buffer stocks being released into the market, their rapid depletion seems inevitable. This means authorities will soon have to replenish reserves—betting that global rice prices remain stable. (Figure 3, middle window)

But even if global rice prices decline, large-scale stockpiling would exacerbate the twin deficits (fiscal and trade deficits). The agricultural sector reported near milestone trade deficit in Q3 2024. (Figure 3, lowest image)

This, in turn, would put additional pressure on the USD-PHP exchange rate, where further peso depreciation would translate into higher import costs, which would help feed into the current inflation cycle.

And now, the Department of Agrarian Reform (DAR) is considering imposing FES on pork prices as well!

It appears authorities believe they can override market dynamics and economic laws through sheer force of policy. But history has shown time and again that such attempts only lead to greater imbalances—necessitating even more interventions in an endless loop of self-inflicted crises.

Good luck to the believers!

VII. Treasury Markets Are Already Telegraphing Inflation Risk

The Philippine Treasury markets are already reflecting this narrative.

Figure 4

The yield curve continues to fall, leading to a bull steepening—a clear signal that the BSP is likely to cut rates. (Figure 4, topmost graph)

While this may provide short-term relief, it also carries risks: looser monetary policy could reignite inflationary pressures while signaling heightened economic uncertainty. 

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices? 

If rice prices are declining and core CPI is slowing, why are authorities aggressively pushing a Food Emergency Security (FES) program? 

The short answer: they want their free lunches to continue. 

Whether through subsidies, price controls, or other interventionist policies, they are ensuring a steady flow of populist measures. 

By the way, the National mid-term Election is in May! 

Importantly, this push signifies a calculated move to secure easier access to cheap credit—leveraging monetary easing to sustain economic illusions. 

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP 

The Bureau of the Treasury (BTr) has yet to release its cash operations report for February 28, limiting our full-year assessment of fiscal health. 

Still, while public debt eased slightly from Php 16.09 trillion in November to Php 16.05 trillion in December, total 2024 public debt closed at an all-time high. 

While the consensus was previously pleased that a slowing deficit had led to a decrease in net debt increases, 2024 experienced "a 9.8% or Php 1.44 trillion increase from the end-2023 level."  (Figure 4, middle chart)

The Bureau of Treasury (BTr) further reported that the "corresponding debt-to-GDP ratio of 60.7% was slightly above the 60.6% revised Medium-Term Fiscal Framework estimate, on account of the lower-than-expected full-year real GDP growth outcome of 5.6%" (Figure 4, lowest diagram)

Yet, this debt increase came despite a supposedly “restrained” deficit—largely due to (potential) record government spending in 2024. 

Put simply, the Php 1.44 trillion debt increase was the trade-off for achieving 5.6% GDP growth. 

There is a cost to everything. 

Yet, the full cost of debt servicing has yet to be published. 

Crucially, this 5.6% GDP growth was artificially fueled by: 

-BSP’s easy money policies,

-Record public spending,

-All-time high public debt,

-Historic bank credit expansion, and

-Near full employment.

Any reversal of these factors—or even a partial pullback—could WIDEN the fiscal deficit to new highs and PUSH debt-to-GDP further upward. 

There is more.

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks

Figure 5

External debt jumped 11.4% in 2024, reaching an all-time high of Php 5.12 trillion. 

Its share of total debt rose for the third consecutive year, now at 31.9%—partly due to peso depreciation but mostly from fresh borrowings totaling Php 401.7 billion. (Figure 5, topmost chart)

Meanwhile, BSP’s January 2025 Gross International Reserves (GIR) shrank by $3.24 billion—its steepest decline since September 2022. This was largely due to their defense of the Philippine peso, even though USD/PHP barely hit 59. (Figure 5, middle pane)

The BSP appears to have adjusted its intervention ceiling or their "upper band" to around 58.7. 

Falling GIR is a price to pay for the USD/PHP peg. (discussed last January)

And remember, 'ample reserves' have barely slowed the USDPHP's juggernaut. (Figure 5, lowest chart)

The BSP also revealed another reason for the GIR decline was a "drawdown on the national government’s (NG) deposits with the BSP to pay off its foreign currency debt obligations." 

Adding another layer of irony, the Philippine government raised $2.25 billion and €1 billion on January 24th. These fresh funds may temporarily boost February’s GIR, reflecting the National Government’s deposits with the BSP. 

Going forward, the government will require even more foreign exchange to service its external debt over time. This suggests continued reliance on foreign borrowing—expanding the BTr’s outstanding FX debt stock and increasing the risk of further peso depreciation. 

With growing dollar scarcity, the BSP’s need to refinance public debt, and the rising FX debt appetite of elite institutions, the government and central bank path-dependence on liquidity injections via easy money and fiscal stimulus have only deepened. 

This, in turn, heightens inflation risks—potentially fueling the third wave of the present inflation cycle. 

Take heed.

Maharlika's NGCP Investment: Economic Nationalism or a Bailout?

 

Don’t you need some ‘wealth’ to create a ‘wealth fund?’ Norway did it with the money it got from North Sea oil. China’s trillion-dollar wealth fund comes from its trade surpluses. Where will the US wealth come from? The government runs deficits—Bill Bonner 

In this issue 

Maharlika's NGCP Investment: Economic Nationalism or a Bailout?

I. Introduction: Maharlika's First Test: Can Conflicting Objectives Deliver Optimal Returns?

II. The Legacy of NAPOCOR: A Historical Overview and its Cautionary Lessons

III. Geopolitical Tensions Permeate the Power Sector

IV. MIC’s Investment in NGCP: A Revival of Economic Nationalism? Shades of Napocor?

A. Advance National Security by Strengthening Oversight of NGCP Management?

B. Economic Benefits: Lowering Electricity Costs by Enhancing Grid Efficiency?

V. Maharlika's NGCP Investment: A Bailout in Disguise? Potentially Inflating an SGP Stock Bubble?"

VI. Maharlika’s Risks and Potential Consequences

VII. Conclusion 

Maharlika's NGCP Investment: Economic Nationalism or a Bailout? 

Is Maharlika’s exposure to the National Grid Corp. about investments, economic nationalism, or a bailout of SGP? Or could hitting all three birds with one stone be feasible? 

__

Nota Bene: This post does not constitute investment advice; rather, it explores the potential risks associated with the recent acquisition of the National Grid Corp. (NGCP) of the Philippines by the Maharlika Investment Corporation, through its controlling shareholder, Synergy Grid and Development Philippines Inc. (SGP).

I. Introduction: Maharlika's First Test: Can Conflicting Objectives Deliver Optimal Returns?

First some news quotes. (all bold mine)

Philippine News Agency, January 27, 2025: Under the deal, MIC will purchase preferred shares in SGP, granting the government a 20 percent stake in the company, which holds a significant 40.2 percent effective ownership in NGCP, the operator of the country’s power grid. Consing noted that the deal will also provide the government with board seats in both SGP and NGCP. “Once the acquisition is completed, we shall be entitled to two out of nine seats in the SGP board, after the total seats are increased from seven to nine. At NGCP, the government gains representation through two out of 15 board seats, following an increase in the total seats from 10 to 15,” he explained. The investment is seen as a crucial step for the government to regain control over the nation’s vital power infrastructure.

Inquirer.net, January 29, 2025: The country’s sovereign wealth fund is investing in the National Grid Corp. of the Philippines (NGCP) to allow the government to monitor the possible emergence of external threats, the head of Maharlika Investment Corp. (MIC) said on Tuesday. MIC president and chief executive officer Rafael Consing Jr. said they would also be interested in buying the 40-percent NGCP stake owned by a Chinese state-owned company once the opportunity arises. 

Inquirer.net, January 28, 2025: The way NGCP can contribute to lower electricity is by ensuring that that rollout indeed happens. Because once you have that transmission grid infrastructure being rolled out successfully, then you would have more power players that can in fact get onto the grid and provide supply to the grid. And, obviously, just like any commodity, as you’ve got more supply coming in, the present power will, at some point in time, come down

The Philippines' sovereign wealth fund (SWF), the Maharlika Investment Corporation (MIC), has made its first investment by acquiring a 20% stake in Synergy Grid and Development Philippines Inc. (SGP), the majority holder of the National Grid Corporation of the Philippines (NGCP), a firm listed on the Philippine Stock Exchange (PSE) 

Is this move primarily about economic interests, or does it also serve geopolitical objectives? 

Is the MIC being used to facilitate the re-nationalization of NGCP by phasing out or displacing China’s state-owned State Grid Corporation of China (SGCC), which holds a 40% stake? 

Or has this, in effect, been an implicit bailout of SGP? 

If so, how can achieving domestic and geopolitical objectives align with the goal of attaining desired financial returns?  

Or how could competing objectives be reconciled to achieve optimal returns? 

II. The Legacy of NAPOCOR: A Historical Overview and its Cautionary Lessons

To better understand the current situation, let's first examine the origins of NGCP, tracing its roots back to its predecessor, the National Power Corporation (NPC). 

The NAPOCOR (NPC), was once the behemoth of the Philippine power industry, centralizing control over both the generation and transmission of electricity. 

Established in 1936 as a non-stock, public corporation under Commonwealth Act No. 120, nationalizing the hydroelectric industry. It was later converted into a government-owned stock corporation by Republic Act 2641 in 1960. Its charter was revised under Republic Act 6395 in 1971. 

While consolidating significant influence over the Philippine electricity market, this monolithic structure came with its pitfalls. 

NAPOCOR accumulated substantial debt due to a combination of over-expansion, mismanagement, political interference, and corruption. 

The corporation's financial stability was further undermined by subsidies, price controls—both contributing to market imbalances—and costly contracts with Independent Power Producers (IPPs), which led to a cycle of financial losses. 

In response, the Electric Power Industry Reform Act (EPIRA) of 2001 was enacted, marking the beginning of the sector's restructuring through privatization. 

The Power Sector Assets and Liabilities Management Corporation (PSALM) was created to manage the sale and privatization of NPC's assets, also assuming NPC's liabilities and obligations.

Figure 1

At its peak, NAPOCOR’s debt, as reported by PSALM, had reached 1.24 trillion pesos by 2003. (Figure 1) 

The National Transmission Corporation (TRANSCO) was established to manage the transmission facilities and assets previously under NAPOCOR.

This restructuring ultimately led to the formation of the National Grid Corporation of the Philippines (NGCP) in 2009, a consortium that included local business tycoons Henry Sy Jr. and Robert Coyiuto Jr., along with China’s state-owned enterprise, the State Grid Corporation of China (SGCC). NGCP assumed operational control of the country’s power grid. 

The key takeaway from NAPOCOR’s experience is that its monopolistic structure created and fostered inefficiencies, corruption, and imbalances, which culminated in massive debt. 

Despite the privatization, NGCP remains a legal monopoly. 

Once again, NGCP operates and maintains the transmission infrastructure, such as power lines and substations, that connects power generation plants—including those owned by NAPOCOR and private generators—to distribution utilities. 

III. Geopolitical Tensions Permeate the Power Sector 

The current Philippine administration's foreign policy can be viewed through the lens of U.S. influence. 

Evidenced by hosting four additional bases for access to the U.S. military in 2023 amidst ongoing maritime disputes in the South China Sea, this stance marks a contrast with the previous Duterte administration's more China-friendly policies. 

This foreign policy shift has also been manifested in actions such as the banning of Philippine Offshore Gaming Operators (POGOs) and the legal actions against Ms. Alice Guo, a former provincial (Tarlac) mayor accused of espionage and involvement in illegal gambling. 

These tensions extend to the NGCP, where the Chinese stake has been cited by media and officials as a national security risk.  

According to a US politically influential think tank, "Fears in both Manila and Washington that Beijing could disable the grid in a time of crisis have lent urgency to efforts to reform its ownership and operational structure". (CSIS, 2024) 

Therefore, heightened scrutiny of China’ government involvement in sectors like NGCP, justified on the ‘kill switch’ or national security risk, combined with increasing military cooperation with the U.S., suggests a Philippine foreign policy trajectory heavily influenced by Washington's strategic objectives. 

IV. MIC’s Investment in NGCP: A Revival of Economic Nationalism? Shades of Napocor?

The stated objectives of MIC’s entry into NGCP through a 20% stake in SGP are twofold: 

A. Advance National Security by Strengthening Oversight of NGCP Management? 

MIC contends that this investment allows for governmental oversight of NGCP management, potentially counterbalancing foreign influence, particularly from China. They have also expressed interest in acquiring the entire SGCC’s stake. 

However, this approach risks "political interference," one of the critical factors that historically plagued the National Power Corporation's (NPC) financial stability. 

Furthermore, a move towards re-nationalization could represent a regressive step, potentially leading to deep financial losses reminiscent of NPC’s past.

B. Economic Benefits: Lowering Electricity Costs by Enhancing Grid Efficiency?

MIC has promoted the investment as a means to improve grid infrastructure, with the expectation that efficiency gains would eventually translate into lower electricity rates for consumers.

First, the latter objective appears secondary to the former. Since all government actions must be publicly justified, MIC’s interventions are presented as beneficial to the consumer.

Figure 2

The Philippines is often cited as having one of the highest electricity rates in Asia. (Figure 2, upper chart) 

However, subsidies on power firms have distorted this metric. The NPC’s subsidy program significantly contributed to its debt accumulation.

Similarly, the government’s attempt to regulate fuel prices via the Oil Price Stabilization Fund (OPSF) ended up as a net subsidy, requiring large bailouts, as noted by the International Institute for Sustainable Development (IISD, 2014). 

In short, Philippine experiences with subsidies have historically been unsuccessful. 

It is also questionable whether dependency on energy imports directly equates to high electricity prices. (Figure 2, lower image)

This simplistic logic would lead to the conclusion that nations that are most dependent on oil and energy imports would have the highest electricity rates, which is not necessarily true—because of many other factors. 

Second, MIC argues that "investing in NGCP could improve the rollout of transmission grid infrastructure, allowing more power players to supply energy to the grid."  

While this proposal is ideal in theory, its practical implementation faces significant challenges. 

One of the primary drivers behind high energy costs is the oligopolistic market structure, characterized by a concentration of power among a few large conglomerates.

Figure 3 

The most prominent players include San Miguel Corporation (PSE: SMC), Aboitiz Power Corporation (PSE: AP), First Gen Corporation (PSE: FGEN), and Manila Electric Company (PSE: MER). In Luzon, for example, seven generation companies hold an estimated 50% of the total installed capacity. (ADMU, 2022) (Figure 3) 

Despite partial deregulation, the concentration of market power among these firms potentially reduces competitive pressures and limits market alternatives, leading to price-setting behaviors that do not reflect true supply and demand dynamics. 

The Wholesale Electricity Spot Market (WESM) was introduced in 2006 to foster competition, yet allegations of anti-competitive behavior emerged soon after its inception. 

Moreover, while EPIRA led to privatization in segments of the industry, the slow pace of implementing reforms, such as open access provisions and retail competition, has maintained high electricity prices, as highlighted in a World Bank study. 

Furthermore, the incumbent regulatory framework, despite its intent to limit market power, has not fully mitigated oligopolistic tendencies, resulting in persistently high prices for consumers. Examples: Bureaucracy and red tape, cross ownership, system losses, conflicting laws, over-taxation and more. 

As a result, the oligopolistic market structure and high energy costs deter foreign direct investment (FDI), as investors seek markets with lower operational costs. 

The likely substantial influence of these oligopolists on the political sphere, which protects their interests through legal frameworks, raises the risks of collusion, cartel-like behavior, and barriers to entry, thereby constraining competition.

Therefore, while MIC’s argument for infrastructure rollout benefiting consumers through competition is necessary, it is crucially insufficient. 

Market concentration among large firms may have significant influence on regulations and their implementation, particularly in the upstream and midstream segments (generation, transmission, and distribution). 

The slow pace of reforms aimed at fostering a competitive environment has severely limited efficiency gains, and consequently, the reduction of electricity rates. 

Third, the Bangko Sentral ng Pilipinas’ (BSP) low interest rates regime has enabled these firms to accumulate substantial or large amounts of debt to finance their commercial operations, which implicitly creates obstacles for competitors unable to access cheap credit. 

Alternatively, this debt accumulation poses systemic financial and economic risks. 

In essence, despite EPIRA and its privatization efforts, monopolistic inefficiencies coupled with readily available cheap credit have effectively transferred NPC’s debt dilemma to the oligopoly. 

Lastly, decades of easy money policies from the BSP have driven a demand boom, resulting in a significant mismatch in the sector’s economic balance. This is evident in overinvestment in areas like real estate, construction, and retail, potentially diverting resources from necessary energy infrastructure and even potentially leading to overinvestment in renewable energy sources at the expense of reliable baseload power from coal, oil, natural gas, and nuclear energy. 

In sum, prioritizing the expansion of a competitive environment where the sector’s pricing reflects actual demand and supply dynamics is essential. 

Liberalization, which should lower the hurdle rate, would intrinsically encourage infrastructure investment without the need for political interventions. 

MIC’s promotion of economic gains from its interventions appears more as a "smoke and mirror" justification for politically colored actions. 

V. Maharlika's NGCP Investment: A Bailout in Disguise? Potentially Inflating an SGP Stock Bubble?" 

An even more fascinating perspective is SGP's financial health. 

Certainly, as a legal monopoly, the National Grid Corporation of the Philippines (NGCP) holds a significant economic advantage—an economic moat. 

Grosso modo, SGP, as the majority shareholder of NGCP, seemingly operates within a rent-seeking paradigm, where wealth is accumulated not through value creation but through leveraging of economic or political environments to secure favorable positions. 

OR, for monopolists, the focus shifts from open market competition, innovation, or improvement, to maintaining their monopoly status by currying favor with political stewards. Subsequently, they leverage this privilege to extract economic rents, often at the expense of consumers or other market participants. 

SGP’s financials and recent developments appear to support this narrative.

Figure 4

Revenue Stagnation: Since Q3 2022, SGP's quarterly revenue has grown by an average of 5.9% over 13 quarters through Q3 2024, with a Compound Annual Growth Rate (CAGR) of only 0.52% since Q3 2020. 

Slowing Profit Trends: During the same periods, quarterly profits expanded by 2.67%, but shrank by 2.25% based on CAGR. 

Notably, a spike in net income in Q2 2022 was attributed to "higher iMAR as approved by ERC effective January 1, 2020 and the recording of Accrued revenue for incremental iMAR 2020 for CY 2020 and 2021." 

iMAR Explanation: As per Businessworld, "iMAR stands for "Interim Maximum Annual Revenue," which refers to the maximum amount of money a power transmission company like the National Grid Corporation of the Philippines (NGCP) is allowed to earn annually from its operations, as approved by the Energy Regulatory Commission (ERC) during a specific regulatory period; essentially setting a cap on how much revenue they can collect from electricity transmission services"

Figure 5

Mounting Liquidity Issues: SGP's cash reserves have been contracting, with an average decrease of 3.9% over 13 quarters through Q3 2024 and a -6.7% CAGR since Q3 2020. 

Surging Debt Accumulation: Conversely, debt and financing charges have escalated. Debt has grown by an average of 12.1% over 13 quarters, with a 2.1% CAGR, while financing charges increased by an average of 5.7% with a 1.9% CAGR. 

SGP’s finances are not exactly healthy. 

Yet NGCP’s recent activities gives further clues. (bold mine) 

ABS-CBN, May 23, 2023: "The National Grid Corporation of the Philippines on Thursday said it was not to blame for delayed projects, and fended off criticism that it was making consumers pay even for delayed projects. The country’s power grid operator also insisted that power transmission improved since it took over operations from the government. A recent Senate hearing found that 66 projects, of which 33 were in Luzon, 19 in the Visayas, and 14 in Mindanao, remained unfinished. " 

ABS-CBN, December 23, 2024: "The Energy Regulatory Commission (ERC) has imposed a total of P15.8 million worth of fines on the National Grid Corporation of the Philippines (NGCP) over "unjustified delays" in 34 out of 37 projects. "

SGP’s tight finances, mainly evidenced by stagnant revenues, declining profits, and deteriorating liquidity, could reflect the challenges faced by NGCP. 

Further, despite the complex political nature of the operations of the grid monopoly, the ERC caps the revenue that NGCP is allowed to generate (Php 36.7 billion annually). 

This limits NGCP’s financial health, potentially leading to liquidity strains and increased borrowings by SGP to finance their projects. 

Fundamentally, his dynamic might resemble a high-stakes path towards Napocor 2.0. 

Besides, the Department of Energy (DoE) sets the plans and policies, while NGCP, as the exclusive franchise holder, is in charge of the operation, maintenance, development, and implementation of projects for the country's power transmission system. 

The ERC regulates and approves rates, monitors performance, and can impose penalties for delays or inefficiencies. 

In short, since NGCP prioritizes fulfilling the administration's political agenda, it seemingly does so with little concern for consumers—does this reflect the rent-seeking paradigm? 

This raises two crucial questions: aside from economic nationalism, could MIC’s entry into NGCP amount to an implicit BAILOUT of SGP? 

And could this package include a deal for China’s SGCC to exit? 

While we are not privy to the legal technicalities leading to MIC’s initial investment in NGCP via a 20% stake in SGP, SGP’s share prices have experienced a resurgence, or spike, since hints of MIC’s entry began to emerge late last year. 

Year-to-date (YTD) returns of SGP shares totaled 17.6% as of February 7th. 

Once again, this raises additional questions:

Figure 6

-Is a stock market bubble being inflated for SGP shares, benefiting not only corporate insiders and their networks, but also political figures and their allies behind the scenes? 

-Considering the price plunge of SGP shares from over 700 in 2017 to the present, resulting in substantial losses for its shareholders, could this potential bailout include efforts to pump up SGP shares to recoup at least a significant portion of these deficits? 

VI. Maharlika’s Risks and Potential Consequences 

The paramount concern revolves around what might happen if MIC's investment, re-nationalization, or its policy of economic nationalism regarding NGCP goes awry. 

What if NGCP replicates the pitfalls of its predecessor, the National Power Corporation (NPC)? How would the resulting losses or deficits be managed? 

Maharlika's investment capital is derived from public funds. If MIC incurs losses, would additional taxpayer money be on the line? Would there be a necessity for a bailout of MIC itself? 

How would potential deficits from MIC affect the country's fiscal health? Could this lead to higher interest rates and a weaker peso, exacerbating economic pressures? 

VII. Conclusion 

Ultimately, Maharlika's NGCP investment, executed through SGP, reflects a tension between seemingly conflicting objectives: securing national security interests and generating optimal returns. 

While proponents tout the deal as a means to lower electricity costs and improve grid efficiency, our concern—given SGP's financial weaknesses—is that MIC’s infusion could, in effect, function as a bailout. 

That is to say, the potential exposure of public funds through the SWF for political goals may conflict with, or potentially override, the Maharlika Investment Corporation’s stated goals: "to ensure economic growth by generating consistent and stable investment returns with appropriate risk limits to preserve and enhance long-term value of the fund; obtaining the best absolute return and achievable financial gains on its investments; and satisfying the requirements of liquidity, safety/security, and yield in order to ensure profitability of the GFIs’ respective funds." 

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references 

Harrison Prétat, Yasir Atalan, Gregory B. Poling, and Benjamin Jensen, Energy Security and the U.S.-Philippine Alliance, Center for Strategic and International Studies, October 21, 2024 

Maria Nimfa Mendoza Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in the Philippines, March 2014, IISD.org p. iv 

Majah-Leah V. Ravago, The Nature and Causes of High Philippine Electricity Price and Potential Remedies, January 19, 2022 Ateneo de Manila University