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.
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.
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
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
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