In this issue:
PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility
Beneath the Headline Growth
Part I: Cycles, Business Cycles, and Market Cycles
I.A Why Business Cycles Are Not Natural Phenomena
I.B. Credit Expansion and the Origin of Boom–Bust Cycles
I.C. Late-Cycle Fragility: Headline Resilience,
Underlying Stress
I.D. Financial Fragility, Opacity, and the Bezzle
Part II: The Late Cycle in the Philippine Context:
Economic and Corporate Activities
II.A. Macro and
Policy Stimulus, An Environment Built to Support Growth
II.B. The GDP Surprise—and Why It Should Not Have Been
One
II.C. The PSEi 30 Aggregate: A Disquieting Divergence
From GDP, The Energy Trio Distortion
II.D. The 9-Month Scorecard: The Same Story, Amplified
II.E. Cash Drain, Debt Surge, and the Minsky Turn
II.F. Concentration, Money Illusion, and Elite
Financialization
II.G. Sectoral Divergences: Real Estate, Retail, Food
Services
II.H. Banking Fragility: Wile E. Coyote Finance
Part III: Conclusion: Late-Cycle Fragility Exposed
PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth
PSEi 30 earnings, leverage, and liquidity strains reveal a
late-stage business cycle
Part I: Cycles, Business Cycles, and Market Cycles
Cycles refer to a series of events that recur in the same order. This concept is most evident in nature: the Earth’s orbit around the sun produces the day–night cycle, while diurnal and seasonal cycles define time itself—days, weeks, months, and years. These natural rhythms shape life cycles, ecological systems, and nearly all activity on the planet.
Figure 1
Economic activity is no exception. Economies evolve through recurring phases collectively known as the business cycle—periods of expansion, peak, slowdown, and contraction over time. Financial markets or market cycles operate within a related rhythm: accumulation (bottom), mark-up (advance or bull market), distribution (peak), and markdown (decline or bear market).
I.A Why Business Cycles Are Not Natural Phenomena
Mainstream economics largely treats business cycles as natural oscillations of aggregate activity. Using leading, coincident, and lagging indicators, it describes how cycles unfold—unfortunately it fails to explain why they occur in the first place: the causality.
Yet widespread, synchronized business errors do not arise spontaneously in a market economy. Such aggregate misallocation occurs only when firms are influenced by a common external force—namely, inflationary monetary and credit policies imposed from outside the market process.
I.B. Credit Expansion and the Origin of Boom–Bust Cycles
As the late great dean of the Austrian School of Economics, Murray N. Rothbard explained, the business cycle is not an inherent feature of a free and unhampered market. It is generated by government-driven bank credit expansion, which artificially suppresses interest rates and induces uneconomic overinvestment—particularly in long-duration capital goods such as machinery, construction, raw materials, and industrial plant.
As long as monetary and credit expansion continues, these distortions remain masked by the euphoria of the boom. But once credit expansion slows or stops—as it must to avoid runaway inflation—the misallocations become visible. Recession is not the disease; it is the corrective process through which the market liquidates unsound investments, realigns prices, and restores coherence between production, demand, and savings. Recovery begins only once this adjustment is completed. (see reference)
I.C. Late-Cycle Fragility: Headline Resilience, Underlying Stress
We have consistently argued that both the Philippine economy and its equity market have been operating in late-cycle territory—or, in market terms already within a bear-phase dynamic.
The late stage of the business cycle is a paradoxical moment. Expansion still dominates headlines, yet the underlying machinery of growth begins to grind.
- Profits remain visible, but margins thin.
- Credit is still available, but increasingly costly.
- Policymakers, media and the mainstream speak of resilience, while households and firms quietly absorb tightening liquidity and rising cost pressures.
This phase is
defined less by collapse than by precarious equilibrium.
- Imbalances accumulate as buffers erode.
- Asset prices may remain elevated, but market breadth narrows.
- Large firms mask stress through consolidation, transfers, and concentration strategies, while smaller players begin to falter—the periphery to the core phenomenon.
- Inventories rise, debt-service burdens increase, and policy transmission weakens.
In such an environment, shocks—whether natural disasters, geopolitical missteps, or financial accidents—carry outsized consequences.
For listed corporates, late-cycle fragility manifests as earnings resilience built on substitution rather than productivity: one-off gains, margin and cash-flow deterioration, rising leverage, emerging liquidity stress, asset reshuffling, narrow sector leadership, and financial engineering—often accompanied by accounting prestidigitation that substitutes for genuine growth.
The result is a corporate landscape that appears stable on the surface yet grows increasingly brittle underneath, mirroring the broader macro paradox of headline resilience alongside systemic vulnerability.
I.D. Financial Fragility, Opacity, and the Bezzle
Furthermore, this stage of the cycle is often accompanied by what Hyman Minsky described as Ponzi finance, where cash flows are insufficient to service obligations without continual refinancing or asset appreciation.
This dynamic frequently intersects with Charles Kindleberger’s politics of swindle and fraud, and John Kenneth Galbraith’s concept of the “bezzle”—the accumulation of undiscovered financial misconduct that grows during booms and is revealed only when liquidity tightens.
Historically, major frauds tend to surface not at the height of optimism, but during the transition from boom to bust. The Enron scandal emerged as the dot-com bubble unraveled; Bernie Madoff’s Ponzi scheme collapsed amid the 2008 Global Financial Crisis; and the COVID-19 downturn exposed widespread abuse of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.
In late-cycle conditions, transparency deteriorates as economic stress rises. Firms, households, and institutions increasingly resort to opacity, accounting maneuvers, and even outright malfeasance—whether to survive, to exploit weakened oversight and abundant credit, or to preserve credit-fueled, status-driven lifestyles that become harder to maintain as conditions tighten.
These behaviors do not cause the cycle, but they amplify fragility, accelerating the loss of confidence once the credit tide recedes.
Part II: The Late Cycle in the Philippine Context: Economic and Corporate Activities
II.A. Macro and Policy Stimulus, An Environment
Built to Support Growth
Any serious economic analysis must begin with the operating environment that shaped outcomes.
The Q3 and nine-month period coincided with what should have been the ‘sweet spot’ of monetary and fiscal support. The Bangko Sentral ng Pilipinas (BSP) had already delivered six of its seven policy rate cuts since August 2024, alongside two reserve requirement ratio (RRR) cuts—from 9% to 5% (a cumulative 400 basis points) in September 2024 and March 2025. Deposit insurance coverage was also doubled in March 2025.
Fiscal deficit also
swelled to pandemic levels through Q3 2025.
II.B. The GDP Surprise—and Why It Should Not Have Been One
Despite these extraordinary supports, Q3 GDP printed a 4.0% growth rate, shocking the mainstream consensus. The slowdown came as leveraged households retrenched, exacerbated by the contraction in government construction and infrastructure outlays following the ongoing flood-control corruption scandal. (as previously discussed, see reference)
The result
was a classic late-cycle outcome: stimulus saturation met weakening
transmission—the law of diminishing returns.
II.C. The PSEi 30 Aggregate: A Disquieting Divergence From GDP, The Energy Trio Distortion
Against this backdrop, the PSEi 30’s operating performance exposed a sharp disconnect from headline GDP.
Figure 2
- Q3 nominal GDP growth slowed from 8.6% (2024) to 4.9% (2025)
- PSEi 30 Q3 revenues decelerated more sharply, from 6.8% to 1.9%
- Q3 Net income growth collapsed from 11.6% to just 0.9% (Figure 2, upper window)
Inflation-adjusted, earnings growth was effectively negative—a stagnation masked only by nominal accounting.
The most consequential distortion came from the SMC–Meralco–AEV energy triangle, discussed previously. In Q3 2025, this grouping accounted for:
- 32.2% of total PSEi 30 revenues
- 15.1% of total net income
Yet even with that concentration, the triangle weighed down aggregate performance. Excluding the trio, PSEi 30 revenues and net income would have grown by 2.4% and 4.7%, respectively. What had boosted results in Q2 became a drag by Q3.
Notably, Q3 PSEi 30 revenues amounted to ~28% of nominal GDP and ~32% of real GDP—a sufficiently large share that these contrasting numbers should call the 4.0% GDP print into question.
If the
largest listed firms are stagnating, aggregate output growth should have been
materially lower.
II.D. The 9-Month Scorecard: The Same Story, Amplified
The 9M data amplifies the fragility.
- PSEi 30 revenue
growth: 8.1% (2024) → 2.07% (2025)
- Nominal GDP:
9.3% → 6.55% (Figure 2, lower image)
- PSEi 30 share of NGDP: declined from 27.9% to 26.9%
This narrowing occurred not as a result of robust GDP, but rather due to a deeper stagnation in corporate activity and a probable overstatement of the GDP estimate.
The energy trio
accounted for 31.2% of nine-month PSEi 30 revenues, yet their aggregate sales
contracted by 3.75%, dragging the index’s growth rate down.
Figure 3
Meanwhile, residue effects from prior asset transfers kept nine-month net income growth elevated at 10%, driven by a 39% earnings surge from the trio. (Figure 3, upper chart)
Ex-trio earnings growth was a far weaker 5.32%.
This is earnings growth without economic growth—a hallmark of late-cycle accounting inflation that likely also bleeds into GDP measurement.
II.E. Cash Drain, Debt
Surge, and the Minsky Turn
One of the most revealing features of the nine-month data is liquidity erosion.
Aggregate PSEi 30 cash balances fell 1.72%, the third consecutive nine-month decline, reaching the lowest level since 2021. (Figure 3, lower diagram)
In contrast, the
energy trio’s cash rose 22.8%, accounting for 36.2% of total cash holdings.
Figure 4
Sixteen of thirty firms recorded cash contractions averaging 11.7%. (Figure 4, upper table)
At the same time, non-bank PSEi 30 debt rose by Php 603.15 billion—the second-largest nine-month increase since 2020, lifting total debt to a record Php 5.98 trillion
Even with caveats: (as previously discussed)
- This debt equals 16.8% of total Philippine financial system assets.
- It represents ~29.7% of nine-month nominal GDP.
- The increase alone accounted for ~75% of nominal GDP growth over the same period.
Furthermore, the PSEi 30’s cash-to-debt ratio declined to its lowest level since at least 2020, thereby diminishing firms’ financial buffers against potential shocks. (Figure 4, lower visual)
Worse, not all cash is liquid, and certain firms increasingly reclassify debt into lease liabilities or off-balance-sheet obligations.
This is textbook Minsky drift: speculative finance sliding into Ponzi structures, with firms plugging liquidity gaps through refinancing rather than genuine cash generation.
II.F. Concentration, Money Illusion, and Elite Financialization
Financial and economic concentration has accelerated sharply.
Six issuers (SMC, AC, SM, LTG, SMPH, JGS) control 55% of non-bank net assets.
Including the four major banks (BDO, BPI, MBT, CBC), concentration rises to ~75% of total PSEi 30 assets.
This centralization mirrors the broader financial system, where banks now account for 83.2% of total financial resources, confirming deepening financialization.
II.G. Sectoral
Divergences: Real Estate, Retail, Food Services
Real Estate:
Top 4 developers posted only 1.2% revenue growth in Q3, vs. official GDP prints
of +6.8% nominal and +4.7% real. Inflation-adjusted revenues imply contraction.
(see previous discussion)
Figure 5
Retail:
Top 6 non-construction chains slowed to 3.7% growth—the weakest since Q3 2021.
SM Retail stagnated at +0.9% despite new malls. Official retail nGDP (+6.3%) diverged
sharply from corporate reality. (Figure 5, topmost graph)
Food Services:
Jollibee, Shakey’s, and Max’s slowed from 9.7% to 3.6%. Jollibee’s domestic
sales growth plunged from 10.1% to 4.3%. Official food services GDP barely
eased (+8.95%), again overstating resilience. (Figure 5, middle image)
All this occurred amid store expansion, record consumer credit, and near-full employment—a stark contradiction of the official GDP narrative.
Yet, cases like Meralco illustrate the money illusion: rising revenues alongside shrinking physical volumes, translating to regulatory-driven profit inflation—a concealed stagflation dynamic rather than real demand growth. (see previous discussion in reference)
The divergence between PSEi 30 performance and household-spending GDP highlights a growing gap between market realities and official statistics.
Even within the GDP figures, slowing household-spending growth coincides with rising government expenditure—an indication/symptom of the crowding-out effect. (Figure 5, lowest chart)
Taken together, these discrepancies suggest inflated official output measures and weakening household consumption despite ongoing stimulus.
Needless to say,
corporate stagnation alongside reported GDP resilience increasingly looks
like statistical gaslighting.
II.H. Banking Fragility:
Wile E. Coyote Finance
Figure 6
Banks have become the lifeblood of the economy, taking up an ever-larger share of the national accounts since 2000—a trend that has accelerated even as GDP growth weakens. (Figure 6, upper image)
The slowing economy is reflected in the PSEi 30’s four major banks: their combined bottom line fell from 5.7% in Q2 to 3.3% in Q3.
Meanwhile, the banking system’s operating income slid from 12.2% to 7.1%, even as provisions surged 539%.
The historically tight correlation between GDP and bank operating income (2015–2022) has broken down since the BSP’s unprecedented rescue of the industry. (Figure 6, lower diagram)
Banks are now running what can only be described as Wile E. Coyote operations: rapidly issuing loans to mask rising delinquencies, while expanding speculative and politically exposed positions (AFS and HTM assets) even as liquidity drains. (see previous discussion, references)
Once they pull back to preserve balance sheets—restricting credit, reducing speculation, or offloading government securities—the façade of financialization will collapse, bailout or no bailout from the BSP.
Part III: Conclusion: Late-Cycle Fragility Exposed
Slowing revenues, weakening consumers, deepening leverage, escalating profit pressures, intensifying liquidity strains, rising opacity, accounting-driven inflation, entrenching concentration, and eroding banking and easy money+ fiscal policy transmissions are not isolated developments. Together, they form a textbook late-cycle configuration.
The Philippine economy and its corporates illustrate precarious equilibrium. GDP prints still narrate strength, but the PSEi 30 reveals deepening fragility: profits masking stress, cash drained, debt piled, and incentives for malfeasance rising.
This is the anatomy of late-cycle fragility—headline resilience concealing systemic vulnerability.
Murray N. Rothbard Economic Controversies p. 236-237 2011 Ludwig von Mises Institute, Mises.org
Prudent Investor Newsletter, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025
Prudent Investor Newsletter, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t, Substack, November 16, 2025
Prudent Investor Newsletter, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025
Prudent Investor Newsletter, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025
No comments:
Post a Comment