The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy

 

Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly—Nassim Nicholas Taleb 

In this issue 

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy 

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!

II. What the RPT Relief Confirms; The Four Phase Bailout Template

III. Phase 1 — Transactional relief: Chromite–San Miguel deal

IV. Phase 2 — RPT Cut: The Regulatory Relief

V. Phase 3 — Financial System Backstopping

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase

VII. Phase 4 — Political Resolution: Socialization

VIII. Phase 4a – Socialization vs. Forced Liberalization

IX. Why This is s Late-Cycle Phenomenon

X. Conclusion: This Episode Was Never About Electricity Prices 

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy 

The four phases of the SMC–AEV–Meralco rescue reinforce the logic of late‑cycle fragility

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry! 

In the third week of November, we noted: 

The triad of San Miguel, Aboitiz, and Meralco illustrates deepening centralization, pillared on a political–economic feedback loop.  

Major industry transactions, carried out with either administration blessing or tacit nudging, function as implicit bailouts channeled through oligarchic control. (bold original) 

That thesis was quietly confirmed weeks later. 

Buried beneath the torrent of daily headlines was a development of first-order importance.

Figure 1

GMANews, December 3, 2025: President Ferdinand Marcos Jr. has ordered the reduction and pardon of all interest and penalties on real property taxes (RPTs) levied on independent power producers (IPPs) for 2025. In a statement, Malacañang said the cut in RPT liabilities of IPPs is "to prevent defaults and economic losses that could affect electricity supply and the government’s fiscal stability." (bold added) (Figure 1, upper news clip) 

Bullseye! 

This was not a routine tax adjustment. It was an explicit admission that private-sector leverage—specifically within the power industry—had crossed into systemic risk territory. 

It bears noting that the five largest power firms by market position are San Miguel, Aboitiz Power, First Gen, PSALM, and ACEN (Mordor Intelligence, 2024). 

The sector is tightly concentrated, politically franchised, and structurally shielded from competition. 

Aggregate 9M debt for the proponents of the Batangas LNG–Ilijan–EERI triangle—the SMC–AEV–MER troika—soared 16.4% YoY, reaching a record Php 2.254 trillion. Financing charges likewise jumped 8.3% YoY, hitting Php 101.17 billion, an all-time high. (Figure 1, lower chart) 

In that same November post, we asked what this meant for 2025–2026. The answer was already embedded in the corporate balance sheets: 

• cash liquidity is tightening
• banks are approaching risk limits
• debt has become the default funding model
• headline GDP growth is increasingly sustained by inter-corporate transactions rather than productive capex
• large conglomerates are supporting one another through balance-sheet swaps 

According to the Inquirer.net, this marks the third time (2023, February 2025 and December 2025) the incumbent administration has forgiven or reduced RPT-related financial charges. That pattern matters. 

Because this bailout arc pushes leverage toward the public balance sheet, the Philippine peso becomes the pressure valve of last resort 

II. What the RPT Relief Confirms; The Four Phase Bailout Template 

This latest RPT condonation has four critical implications: 

1. Political brokerage: Confirms the deal was arranged and brokered politically—a backstop to buy time, not reform.

2. Elite rescue: The energy sector operates through de facto monopolistic political franchises; relief accrues to incumbents, not consumers.

3. Late-cycle marker: Preemptive default prevention reflects an economy drifting into business-cycle exhaustion, where failures are no longer politically tolerable.

4. Counterparty contagion: Because creditors to IPPs are also elite-controlled, counterparties will need support—expanding the bailout perimeter. 

What we are now observing is a four-phase bailout arc in the Philippine energy sector:

Transactional Relief → Regulatory Relief → Financial System Backstopping → Resolution by Socialization/Forced Liberalization. 

III. Phase 1 — Transactional relief: Chromite–San Miguel deal 

The opening move comes disguised as a "strategic partnership." 

In reality, AEV/Meralco—through Chromite Gas Holdings—absorbed San Miguel’s stressed LNG and Ilijan assets (SPPC, EERI, related industrial estate and terminal exposure). Balance-sheet pressure is eased without declaring stress; earnings volatility was suppressed, and leverage was redistributed rather than reduced—in the interim. 

This phase is intentionally ambiguous. No one calls it a rescue. There is no emergency language, no fiscal line item. The objective is clear: prevent immediate balance-sheet failure without triggering market discipline, buying time before the state is forced to intervene. 

It sets a crucial precedent—private leverage can be quietly transferred and restructured under the guise of efficiency. 

This is a classic late-cycle hallmark: defaults become politically unacceptable, but overt bailouts are still premature. 

IV. Phase 2 — RPT Cut: The Regulatory Relief 

The next phase shifts from private camouflage to public condonation. The RPT cut is decisive. 

Malacañang’s own justification—"to prevent defaults and economic losses that could affect electricity supply and fiscal stability"—reframes private leverage as a public-interest problem. That line is the SMOKING GUN! 

At this stage, the bailout is no longer implicit; it is simply reframed as stability policy. 

Fixed costs are reduced, cash flows are protected, local governments (including Special Education Fund allocations) lose revenue, and political risk is shifted from firms to the sovereign. 

Concentrated gains, distributed costs—the political rent-seeking model, public choice theory in action. 

Bluntly, profits remain privatized while costs are socialized—a political free lunch and textbook oligarchic capture.

This phase entrenches moral hazard: elites learn leverage will be accommodated, not disciplined. Smaller players and consumers are sidelined; political-economic imbalances mount, fragility escalates.

Crucially, previous rounds of subsidies have failed to repair balance sheets or deliver durable consumer relief. The evidence is clear: these measures stabilize optics, not fundamentals.

These two phases are ex-post. We now turn to the potential ex-ante stages. 

V. Phase 3 — Financial System Backstopping 

This phase is partly in process and could intensify. 

Why issue such a justification unless there is a clear and present danger? 

The fact that this is the SECOND time in 2025 that authorities have subsidized IPPs through RPTs speaks volumes about the underlying problems 

Despite the BSP’s aggressive easing cycle—rate cuts, reserve‑requirement reductions, doubled deposit insurance, and record public spending that has pushed deficits back toward pandemic levels—liquidity stress persists. This signals a supply-side balance-sheet problem, not a demand shortfall. 

The stress point is becoming unmistakable: elite-owned leverage, particularly in capital-intensive sectors like power—amid slowing growth. 

Figure 2

According to the BSP’s Depository Corporations Survey, as of October the private sector’s share of domestic claims rose to 64.7%, while the combined financial and private sector share of M3 climbed to 80.63%. In Q3, domestic claims reached 77.6% of GDP, nearly matching the pandemic highs of 77.7% in Q1 and Q4 2021. By contrast, M2 and M3 shares of GDP—though still elevated since the pandemic recession—have been slowing, a clear departure from their previous synchronous trajectory during 2006–2020. (Figure 2) 

This divergence underscores the core problem: systemic leverage has risen through domestic claims, concentrated among elite firms, yet its transmission to real economic activity has weakened. 

This is the reason for the rescue mission.

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase 

As unproductive leverage persists and economic growth slows, bank balance sheets deteriorate. Liquidity tightens, lending slows, and stress migrates from corporates to the financial system. 

The BSP will likely respond with escalating use of its pandemic playbook:

• Deepening easing: policy-rate and RRR cuts
• Implicit injections through BSP facilities.
• Explicit support: direct infusions (e.g., the Php 2.3 trillion precedent).
• Regulatory forbearance: capital relief and provisioning leniency.
• Soft-peg defense: attempts to stabilize USD/PHP. 

Yet contradictions mount.

Figure 3

Monetary easing is constrained by inflation and FX risk; tightening risks amplifying bank stress.  Domestic liquidity and external liabilities have been key drivers of the USDPHP’s rise. (Figure 3) 

As domestic claims rise without generating real-sector activity, liquidity hoarding intensifies, weakening the monetary transmission mechanism and amplifying FX vulnerability. 

The USD/PHP soft-peg becomes fragile—defense drains reserves, while abandonment risks inflation and capital flight. 

Policy enters a trap: support the system and weaken the currency, or guard the currency and fracture the system. 

Diminishing returns begin to cannibalize monetary and economic stability. 

VII. Phase 4 — Political Resolution: Socialization 

When liquidity support and regulatory masking can no longer hold, losses are formally absorbed by the state:

• Nationalization: partial or full state control of critical assets.
• Recapitalization: government injections into systemically important institutions.
• Bad-bank vehicle: a ‘Freddie Mac’–style structure to warehouse distressed assets while preserving legacy ownership. 

Losses are socialized; control is recentralized. 

The public balance sheet expands sharply while elite actors exit with preserved equity, retained assets, or negotiated upside. What began as a "strategic deal" ends as systemic capture, with nationalization the final stop in a late-cycle rescue arc. 

VIII. Phase 4a – Socialization vs. Forced Liberalization 

Late-cycle bailout arcs bifurcate. 

If the state retains fiscal and monetary capacity, losses are socialized through nationalization or resolution vehicles. If capacity is lost—via reserve depletion, inflation, or debt saturation—the system drifts toward forced liberalization. Market discipline is not restored deliberately; it re-emerges violently. 

In this scenario, incumbent protections collapse, policy support evaporates, and asset values are repriced downward. It may resemble "liberalization," but it is not reform—it is involuntary liquidation triggered by exhausted savings and unsustainable balance sheets or by unsustainable economics—resulting in disorderly transitions, and heightened political instability. 

Ideology shapes the preferred response. 

The populist embrace of social democracy, with its preference for top-down conflict resolution, skews the political response toward socialization. 

But ideology is not sovereign and cannot override economics: real savings and fiscal capacity, not preference, ultimately determines which path the cycle takes. When the state can no longer absorb fragility, liberalization is not chosen—it is imposed. 

IX. Why This is s Late-Cycle Phenomenon 

These phases occur when:

• Leverage is high.
• Political tolerance for defaults has collapsed.
• Asset extraction has run its course.
• The state becomes the residual risk holder. 

In early or mid-cycle, failure disciplines excess. 

In late cycles, failure is deferred, masked, and ultimately absorbed by the public—after market discipline has already broken down. 

X. Conclusion: This Episode Was Never About Electricity Prices 

This episode was never about electricity prices. 

The Philippine energy-sector rescue is not a single policy choice but a phased continuum: transactional camouflage, regulatory condonation, financial backstopping, and ultimately either socialization or forced liberalization. Each phase follows the same late-cycle logic—fragility is too politically costly to reveal, so it is deferred, disguised, and transferred away from the firms that created it.

What began as a "strategic partnership" now stands exposed as a systemic bailout, with the state increasingly positioned as the residual risk holder. 

This is the defining feature of a late-cycle economy: leverage is high, defaults are politically intolerable, and oligarchic control ensure that private losses migrate toward the public balance sheet. Consumers and taxpayers ultimately bear the burden. 

The real question is not whether the cycle ends in public absorption of losses, but how much fragility will be socialized before a reckoning becomes unavoidable. 

Crucially, not all late-stage bailouts climax in outright socialization. When fiscal capacity collapses—through reserve depletion, inflation pressure, or debt saturation—the path can shift toward forced liberalization or selective deregulation and privatization. 

This is not genuine reform but an involuntary unwind: protection collapses, policy support recedes, and assets are repriced downward. It looks liberal but functions as disorderly liquidation, with distributional costs shifted onto households while elites regroup. 

Ideology shapes the state’s instincts. Populist social democracy, market‑averse and reliant on top‑down resolution, leans toward socialization. Liberalization, by contrast, rests on cooperation, division of labor, property rights, and rule of law — mechanisms that can resolve conflict without central command. 

Yet ideology alone does not decide the path: fiscal capacity and real savings ultimately determine whether fragility is absorbed by the state or forced back into the market. 

Thus, the endgame bifurcates: 

1. Resolution by Socialization – nationalization, recapitalization, or bad-asset vehicles that warehouse losses while preserving incumbent control. 

2. Resolution by Forced Liberalization – selective deregulation, privatization, and asset sales driven not by ideology but by incapacity, where the state abandons protection because it can no longer sustain it. 

Both paths are late-cycle responses to the same underlying condition: systemic fragility accumulated over years of leverage, political accommodation, and institutional rent-seeking capture. 

They differ not in purpose, but in the mechanism through which risk is transferred—and in both cases, the public ultimately shoulders the cost. 

In late cycles, the currency becomes the final referendum on the system’s accumulated fragility 

Caveat emptor.

____ 

References

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025 

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025

PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

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

Twin Deficits, Monetary Inflation and April’s Steady CPI, Manufacturing Stagflation or Deflation?

 

Now what does this mean? Deficits! This means that the government spends more than it collects in taxes and in borrowing from the people; it means government spending for all those purposes for which the government wants to spend. This means inflation, pushing more money into the market; it doesn't matter for what purpose. And that means reducing the purchasing power of each monetary unit. Instead of collecting the money that the government wanted to spend, the government fabricated the money. Printing money is the easiest thing. Every government is clever enough to do it—Ludwig von Mises 

 

In this issue: 

 

Twin Deficits, Monetary Inflation and April’s Steady CPI, Manufacturing Stagflation or Deflation? 

I. 1Q 2021’s Record Fiscal Performance; The Popularity of Inflationary Policies 

II. Monetary Inflation and the CPI; April’s Unchanged CPI 

III. Global Commodity and Food Prices Surge! 

IV. Philippine Manufacturing: Deflation or Stagflation?  

V. Import Boom: Restocking? Export Boom: Re-exports or Global Demand? 

Twin Deficits, Monetary Inflation and April’s Steady CPI, Manufacturing Stagflation or Deflation? 

 

The BSP has yet to publish data on domestic liquidity and bank lending, which was due last week.  

 

Nevertheless, the 1Q GDP will be announced by authorities this week.  

 

Aside from the data on domestic liquidity and bank lending, the financial statements of the banking industry are due for publication this week. 

 

It is a futile exercise to analyze the CPI in relation to the financial system and the economy without the contribution of the money supply from credit and direct BSP interventions. 

I. 1Q 2021’s Record Fiscal Performance; The Popularity of Inflationary Policies 

 

Figure 1 

2021 opens with a string of records. 

 

From the CNN (April 27): The country’s fiscal deficit ballooned in March to more than double its size a year ago, as government expands expenditures while revenues from taxes and various levies continue to plunge. The budget deficit grew to ₱191.4 billion during the month, a big rise from the ₱71.6 billion in the same month last year, the Bureau of the Treasury reported Tuesday. Government spending rose by 22.3% annually, but revenue collections dwindled by 17.3% in the period under review. 

 

The 50.6% plunge in non-tax revenues in the 1Q pulled down overall revenues, even as the BIR and the Bureau of Customs posted flat to marginal growth of .18% and 2.66%, respectively.  Despite the lackluster growth, 1Q 2021 revenues reached a record Php 626.04 billion.  

 

The CREATE law wasn’t the cause of the shortfall in fiscal revenues in the 1Q. Instead, the 50.6% plunge in non-tax revenues 1Q pulled down overall revenues, even as the BIR and the Bureau of Customs posted flat to marginal growth of .18% and 2.66%, respectively. 

 

On the other hand, powered by National Government disbursements, public expenditures soared 19.86% in the 1Q from a year ago, the second-highest growth rate in at least 13 years to a record Php 849.231 billion.  

 

Finally, strong spending in the face of the weak revenues resulted in a record Php 321.5 billion fiscal deficit in the same period! 

 

With the GDP projected with 6.5% to 7.5% growth this year, the National Government sees a deficit of 8.9% or about Php 1.7 trillion. That’s about 24% higher than last year’s historic gap of Php 1.371 trillion. The 1Q deficit accounts for about 19% of the annualized target.  

 

From the DBCC (December 20, 2020): Given the revised revenue and disbursement program, the deficit program for 2020 is narrowed down from 9.6 percent of GDP to 7.6 percent of GDP in 2020. This is adjusted to an estimated 8.9 percent of GDP in 2021 and 7.3 percent of GDP in 2022.  

 

Figure 2 

 

To finance this, the National Government raised a record Php 1.186 trillion in the first three months of the year, about a third of the over Php 3 trillion of financing targeted this year! 

 

And as of the 1Q, the Treasury’s cash-at-hand stands at Php 602.5 billion, the second-highest in history. 

  

As of March, the Bureau of Treasury’s unparalleled financing pushed up the overall debt stock to a landmark Php 10.774 trillion and counting! Foreign Debt accounted for 28.12% or Php 3.03 trillion. 

  

And the cumulative carrying debt servicing cost of Php 521.5 billion from the debt stock of the previous period reached a stunning 54.2% of 2020’s record Php 962.5 billion in the 1Q alone! 

  

In 2020, debt servicing accounted for 40.6% of the year’s revenues of Php 2.372 trillion which most likely will be eclipsed this year, as the growth of the debt stock outsprints the GDP. 

 

From the perspective of the consensus, which sees the economy in the statistics of spending framework, 1Q’s robust growth in public spending will likely cushion the declines endured by the private sector. 

 

Yes, but…  

 

…since the government depends on the private sector for its sustenance, it exaggerates or overstates the economic performance, with its attendant costs—financial, coordination, and resource distribution—carried well into the future. The splendid growth numbers of debt and debt servicing bear these out.   

  

More importantly, with the implicit goal of attaining centralization, the administration’s economic developmental paradigm has been anchored on debt-financed deficit spending. 

 

Therefore, debt and budget deficits have swelled and are likely to balloon further under this path-dependent model of political governance. Don’t forget record debt and deficits emerged even before the pandemic. The difference is on the escalation.   

 

This popular belief in a top-bottom, centrally planned political economy is not something that emerged out of a vacuum. It is essentially a product of the process of easy money policies of the BSP channeled through time. 

 

First, an inflationary (easy money) regime creates false signals to the economy that bountiful savings and resources are available than it has. Through credit expansion that artificially lowers interest rates and misshapes the term structure of interest rates, such policies encourage the misallocation of resources and systemic mispricing. 

 

As the dean of the Austrian School of Economics, the heroic Murray Rothbard wrote, 

 

Inflation, therefore, tricks the businessman: it destroys one of his main signposts and leads him to believe that he has gained extra profits when he is just able to replace capital. Hence, he will undoubtedly be tempted to consume out of these profits and thereby unwittingly consume capital as well. Thus, inflation tends at once to repress saving-investment and to cause consumption of capital. 

 

Murray N. Rothbard A. Inflation and Credit Expansion 11. Binary Intervention: Inflation and Business Cycles Man, Economy, and State, with Power and Market, Mises.org 

 

Next, monetary inflation further affects people’s values and preferences over time. As the great Journalist Henry Hazlitt wrote, 

 

Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse. 

 

Henry Hazlitt, Chapter 22, The Mirage of Inflation, Economics in One Lesson p.189 Hacer.org  

 

And so this incredible transformation towards a high time preference capital consuming political economy through the race-to-build supply bubble economy, and currently, the grand experiment with a neo-socialist state. 

 

II. Monetary Inflation and the CPI; April’s Unchanged CPI 

 

Inflation, from our perspective, is not the price changes of goods and services that have been peddled in public by the establishment. Further, the government’s statistical inflation represents a symptom than a cause.  

 

This popular and politically sensitive benchmark barely depicts an accurate picture. Because of the variances of its utilities on individuals, one cannot average prices of different goods and services. 

 

As the great Austrian Economist Ludwig von Mises wrote about inflation’s redefinition, 

           

The semantic revolution which is one of the characteristic features of our day has obscured and confused this fact. The term inflation is used with a new connotation. What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless 

 

Ludwig von Mises, Planning for Freedom p.79, Mises.org 

 

Instead, inflation is about money supply growth, either from the BSP’s digital press or through its controlled banking system designed to support the political-economic system. The rate of change of monetary inflation measures the rate of change of the loss of purchasing power of the currency relative to individuals as part of the socio-economic pool. 

 

To see media host a monthly guessing game of the CPI played by mainstream analysts is amusing. It is like the parlor game of “pin the tail on the donkey”. It provides neither value nor consequences but only signals their reverence to such statistic. It does not even establish the predictive capability of institutions.  

 

Right or wrong, once the CPI is published, rationalizations, paraded as analysis, are conveniently provided.   

 

From the Businessworld (May 6, 2021) INFLATION remained stable in April, while core inflation eased to a five-month low, leading economists to expect the central bank to keep rates on hold at next week’s policy-setting meeting. Preliminary data from the Philippine Statistics Authority released on Wednesday showed the consumer price index rose by 4.5% year on year last month, unchanged from March but faster than 2.2% in April 2020. This as price increases for food staples such as rice and vegetables slowed, helping offset a spike in transportation costs caused by higher oil prices. April headline inflation was lower than the median 4.7% in an analyst poll by BusinessWorld late last week, and settled within the Bangko Sentral ng Pilipinas’ (BSP) 4.2-5% estimate. Year to date, inflation averaged at 4.5%, slightly above the BSP’s 2-4% target, as well as its inflation forecast of 4.2% for the year. April was the fourth month in a row that inflation went beyond this year’s target. 

 

Sure, economic agents are the most convenient scapegoats for any price imbalances. Blame greed on them (Garlic traders in 2014, Rice hoarders in 2018 and Pig profiteers in the present)! 

 

But have these agents been operating freely, or are they under a politically restrained environment? If the latter, how have the incumbent policies affected economic coordination and the allocation process of the industry? What are the trade-offs or opportunity costs? Compared to what? 

 

Think mobility restrictions or price controls. How would these impact the production, distribution, consumption, financial, and capital formation process? What are its short and longer-term consequences? Are short-term political fixes sustainable? What are their costs? 

  

How much of the current political environment has caused disruptions on Say’s Law or the Law of Markets (consumption is a function of production)?  

 

Have business (producers and service providers) closures and disruptions not been the primary sources for income and job losses, as well as, dislocations of supply, aggravated by external factors (such as the ASF or the Suez Canal blockage)? 

 

And while cost-push inflation from supply shocks serves as convenient excuses, demand is certainly not zero or close to it. 

 

Hasn’t the jump in public spending been engineered to bolster aggregate demand?  That is to say, most of the current demand stems from income and cash flows derived from the network of entities, in particular, the National Government and private enterprises, operating around public spending projects, including infrastructure. The 1Q data shows this. 

 

And how about the banking industry, which continues to wallow and swim in cash from the BSP’s liquidity and relief programs? 

 

Figure 3 

 

Yes, April’s CPI steadied, said authorities. Food prices slipped. Core CPI also slid. But as part of the Core, the Transport CPI jumped, which negated some of these declines.  

 

But the uptrend of the CPI remains intact. 

  

Interestingly, as a significant segment of the economy endured another set of stringent lockdowns, the restaurant CPI surged with the NCR contributing most.   

 

Authorities prohibited restaurants from operating at the onset of the stringent lockdown in April 2020. But then, the NCR’s resto CPI still posted gains! Perhaps, ghost consumers were responsible.  

 

This April, only outdoor dining was granted to them. But NCR’s restaurant CPI spiked to 1.8% from 1.1% a month ago.  

 

Back when food prices accelerated in the GCQ days of January to February 2021, NCR’s resto CPI bottomed. Strange numbers. 

 

III. Global Commodity and Food Prices Surge! 

 

Figure 4 

The continuing restrictions in transport mobility have fueled the spike in the Transport CPI. But soaring international prices of oil have also abetted and accelerated its ascent. Yes, external forces have some influence too. 

Also, booming food and commodity prices appear to be closing the window for arbitrages through imports for affordable supplies.  

 

According to analyst Doug Noland, “After surging another 3.7% this week (lumber up 12%, copper 6%, corn 9%), the Bloomberg Commodities Index has already gained 20% this year. Lumber enjoys a y-t-d gain of 93% - WTI Crude 34%, Gasoline 51%, Copper 35%, Aluminum 26%, Steel Rebar 32%, Corn 51%, Soybeans 22%, Wheat 19%, Coffee 18%, Sugar 13%, Cotton 15%, Lean Hogs 59%...” 

 

Global food prices surged for the 11^th straight month in April, reported the UN’s Food and Agricultural Organization (FAO). 

 

A spillover effect on prices from the tsunami of liquidity from the collective actions of global central banks has diffused from asset markets into commodities, raw materials, and food.   

 

At any rate, escalating inflationary pressures are not only from domestic origins but also global.  

 

The current dynamics exhibit the transmission mechanism of the inflation-deflation or boom-bust cycles around the world.  

 

IV. Philippine Manufacturing: Deflation or Stagflation?  

 

Here’s the thing.  

 

To justify the current subsidies to the banking industry using financial repression policies, the establishment prominently uses cost-push inflation from a supply shock at the expense of the savers. 

 

Only in the condition that markets are allowed to work, cost-push inflation should be transitory.   

 

But current conditions do not fit the bill.  

 

Authorities further tell us the manufacturing sector collapsed in March, marking the 13^th straight month of sharp contractions.  

 

Figure 5 

The value and volume of domestic factories crashed in March.  

 

According to the PSA: The Value of Production Index (VaPI) for manufacturing continued to drop at an annual rate of -74.2 percent in March 2021. This decline was faster than the reported downturn in the previous month of -46.4 percent and in March 2020 of -25.1 percent.  The March 2021 annual growth rate was the fastest decline since September 2020. … The Volume of Production Index (VoPI) also remained at a downtrend with an annual rate of -73.4 percent in March 2021. This downturn was faster than the -43.3 percent decrease registered in the previous month. In March 2020, the annual rate of VoPI was recorded at -20.4 percent. 

 

Despite the doldrums, input price deflation eased over the same period. 

 

Outside the flat performance of February 2020, Philippine manufacturing has endured a recession since February 2019, or the industry registered contractions in 24 of the last 25 months! 

 

And outside imports, the prolonged manufacturing recession translates to the using up or depleting of the existing inventories. 

 

So from the PSA’s perspective, demand has been absent in the manufacturing sector as signified by the recession and input price deflation.  

 

But the IHS Markit has a diametrical perspective of local factory conditions in April (May 3): As a result of tightening lockdown measures, many clients suspended their operations with demand faltering for the first time since December 2020. Domestic demand was especially subdued with the rate of reduction among the sharpest in the series. Higher sales to European markets which have begun to gradually reopen, reportedly led to a softer deterioration in exports, however. Firms scaled back on their hiring efforts during the month with a weak demand environment and voluntary resignations often mentioned as driving the decline in employment. Job shedding has now been seen in each month since February 2020, with the latest decline the quickest in four months. That said, a sustained period of depleting backlogs suggested sufficient capacity at Filipino manufacturers. Goods producers saw another severe decline in supplier performance during April with respondents noting that virus related restrictions had markedly increased lead times and limited raw material availability. Consequently, firms faced additional surcharges and higher freight costs. A renewed fall in output and new orders led companies to reduce their purchasing activity. The rate of decline was the fourth quickest in the series history. Meanwhile, pre- and post- production inventory growth moderated amid a weaker demand environment and greater raw material costs. Input shortages and higher raw material costs were widely reported in the latest survey period. Input price inflation accelerated for the sixth month running, with the latest uptick the strongest in over two-and-a-half years. In turn, this reportedly led to a faster uptick in output charges set by manufacturers, as firms sought to partially pass on greater costs to clients. 

 

So demand stagnated on business closures while the labor force suffered more cuts. But price pressures on inputs and outputs remained significant.  

 

Or, a stagnant output, high unemployment rates, and rising prices have plagued the sector. Have these not been called stagflation? 

 

According to Markit, price pressures have spread beyond food and energy. Nevertheless, if demand is entirely weak, why the high prices?  

 

To what extent has the BSP’s liquidity program been a factor? 

 

V. Import Boom: Restocking? Export Boom: Re-exports or Global Demand? 

 

And if domestic firms have been inadequate in providing supply, then the rest must come from abroad, right? 

 

According to the PSA, “Total imported goods in March 2021, which amounted to USD 9.10 billion, increased at an annual rate of 16.6 percent.” 

 

Perhaps, imports were not only for domestic consumption but also for re-exports.  

 

Again the PSA, “The country’s total export sales in March 2021, amounting to USD 6.68 billion, increased at an annual rate of 31.6 percent from a decrease of -1.5 percent in the previous month. In March 2020, total export sales declined at a rate of -15.8 percent annually.” If local manufacturers were in a slump, then what’s the source of such exports?  

 

The trade deficit slightly narrowed in March because of the stronger exports, “Balance of trade in goods (BoT-G) is the difference between the value of export and import. BoT-G in March 2021 amounted to USD -2.41 billion, representing a trade deficit with an annual decrease of -11.5 percent.”  

 

Despite the export boom in March, the trade deficit remains significant.   

 

Again, after months of stagnant imports and domestic production, inventories must have been depleted to have spurred a restocking last March.  

 

Also, supply shortages abroad could have ramped up the level of exports. Sadly, neither data from the PSA nor Markit supports this scenario. Yet.  

 

But should demand from segments of the economy show signs of (even minor) improvements, will current supplies be enough?  

 

Or will this stoke and accelerate the uptrend in the CPI? 

 

The twin deficits exhibit that the nation is spending far more than it earns. Thus, authorities are frantically borrowing and desperately adding liquidity to bridge gaps from an unsustainable economic development model.  

 

Another story is that analyzing related government economic and financial statistics seems like placing the square peg in a round hole. They barely fit. 

 

Perhaps, one can add interventions on the marketplace to justify the supposed soundness of the macroeconomic picture propped up by an inflationary easy money regime.