Is the Philippines on the Brink of a 2025 Fiscal Shock?

 

You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting). Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying—Ray Dalio

In this issue

Is the Philippines on the Brink of a 2025 Fiscal Shock?

I. A Brewing Fiscal Storm?

II. April 2025 vs April 2024: A Sharp Deterioration

III. Four-Month Performance: Weak Revenue Momentum

IV. Weak Revenue Despite Loose Conditions: A Structural Problem?

V. Budget Math: A Deficit Blowout in the Making?

VI. Economic Fragility Threatens Further Revenue Weakness

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

B. External Trade: Consumer Import Growth Sharply Slows

C. Headline and Core CPI: More Evidence of Demand Weakness

D. Labor Market Deterioration, Hidden Labor Market Realities

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

B. Debt Payment Dynamics

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition

X. Crowding Out Effect and Interest Rate Pressures

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

XIII. Conclusion: Fiscal Shock Watch 2025 

Is the Philippines on the Brink of a 2025 Fiscal Shock? 

April's budget surplus masks a deeper fiscal crisis brewing beneath record-high deficits and weakening revenue collection

I. A Brewing Fiscal Storm? 

Is the Philippines teetering on the brink of a fiscal shock?  We are about to find out after eight months of government data. 

The Bureau of the Treasury’s April 2025 cash operations report confirms our suspicion that the government is struggling to meet critical fiscal targets, which should raise concerns about economic stability. 

As noted in early May: "A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track." (Prudent Investor, May 2025) 

The Inquirer.net reported on May 28, 2025: "The national government recorded a budget surplus of P67.3 billion in April, surging by 57.51 percent or P24.6 billion from a year ago, as tax revenues posted stronger growth and spending slowed for the month. However, for the January to April period, the cumulative budget deficit surged by 78.98 percent to P411.5 billion, as public spending rose by 13.57 percent to support economic activity and the priority programs of the Marcos administration." 

Media narratives either echoed the official line on tax revenue strength or highlighted spending restraint as causes for April’s surplus. But both perspectives overlook a critical detail: April’s surplus aligns not just with the 2023 VAT filing shift to a quarterly basis (previously discussed) but—more importantly—with the "annual tax filing deadline"—a period typically associated with a revenue spike. Yet, even this failed to close the fiscal gap. 

Additionally, the record-high deficits in Q1, persisting into the first four months, have gone largely unaddressed in mainstream discussions. 

To cut to the chase: April data signals a further weakening in the revenue base—right in the face of unrelenting public expenditure, pushing the deficit to historic levels. 

Let’s delve into the details to understand the scope of this fiscal challenge. 

II. April 2025 vs April 2024: A Sharp Deterioration 

In April 2025: 

• Revenues fell 2.82%
• Tax revenues grew 7.84%
• Non-tax revenues plunged 68.08%
• Bureau of Internal Revenue (BIR) growth of 11.1% boosted tax revenues
• Bureau of Customs (BoC) 7.5% declined, which weighed on overall performance

Compare that to April 2024: 

• Revenues soared 21.9%
• Tax revenues surged 13.9%
• Non-tax revenues rocketed 114%
• Tax revenues were anchored by BIR's 12.65% growth and the BoC delivered a strong 19.5%.

Clearly, April 2025 showed a sharp drop in performance despite the same structural advantages related to annual filings.

Figure 1       

The nominal (peso) figures show revenue collections falling significantly short of April 2024's all-time high. (Figure 1, topmost window)

Relative to the VAT’s quarterly cycle, note that the combined January and April 2025 surpluses (Php 135.66 billion) exceeded 2024’s (Php 130.7 billion) by just 3.8%—barely moving the needle against the Q1 fiscal gap. (Figure 1, second to the highest image) 

III. Four-Month Performance: Weak Revenue Momentum 

For January to April 2025: 

• Revenues grew a meager 3.3%.
• Tax revenues rose 11.5%, while non-tax revenues collapsed 51.94%.
• The BIR and BoC posted 14.5% and 2.16% growth, respectively.

In contrast, the first four months of 2024 showed:

• Revenues up 16.8%.
• Tax revenues up 13.22%.
• Non-tax revenues up 48.81%.
• The BIR and BoC grew by 15.35% and 6.47%, respectively. 

Clearly, April 2025 didn’t just underperform—it dragged down the already fragile broader four-month revenue trend. (Figure 1, second to the lowest visual) 

IV. Weak Revenue Despite Loose Conditions: A Structural Problem? 

Critically, Q1’s collection performance coincided with the full effects of the BSP’s first easing cycle in 2024, while April began reflecting partial effects of the second phase. 

Additionally, macro conditions were supportive:

• Bank credit growth was strong.
• Labor market conditions were reported as near full employment.
• Inflation slowed.

Universal-commercial bank loans jumped 11.85% in April to a record Php 12.931 trillion. Yet, public revenues stalled. (Figure 1, lowest graph) 

In short, despite historically loose financial conditions, the government has already been experiencing collection issues—a potential symptom of diminishing returns from BSP’s easy-money regime.

This suggests that further monetary stimulus yields progressively smaller positive impacts on revenue generation or economic growth, potentially reflecting inefficiencies in credit transmission due to mounting balance sheet problems. 

Which leads us to the trillion-peso question: What happens when financial conditions tighten? 

V. Budget Math: A Deficit Blowout in the Making?

From January to April, total revenues reached Php 1.520 trillion. Annualized, that projects Php 4.561 trillion—assuming average monthly intake of Php 380.06 billion. 

Compare that to the 2025 enacted budget of Php 6.326 trillion—already a base case considering six straight years of overspending. Authorities have already disbursed Php 1.932 trillion, implying a remaining monthly average of Php 549.28 billion. 

Bluntly put: At the current pace, 2025 could register a deficit of Php 1.765 trillion—5.7% higher than 2021’s all-time high of Php 1.67 trillion!

The key difference? 2021’s deficit was a deliberate fiscal stabilizer—alongside the BSP's unprecedented monetary and regulatory measures—in response to the pandemic. 

In 2025, no downturn has yet emerged—but the deficit itself threatens to trigger one.

VI. Economic Fragility Threatens Further Revenue Weakness 

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

Figure 2

Since its peak in July 2024, manufacturing loans have been decelerating. March growth was just 2%. However, PPI rose only 0.06% in April YoY—barely moving. (Figure 2, topmost pane)

Though manufacturing volume/value both rose 4.2–4.3% inApril, this likely reflected distortions from new Trump tariffs effective that month.

The S&P PMI index showed a similar spike to 53 in April but slumped to 50 in May. (Figure 2, second to the highest chart)

B. External Trade: Consumer Import Growth Sharply Slows

April imports fell 7.2%, while exports rose 7%, compressing the trade deficit by 26%. (Figure 2, second to the lowest diagram)

But consumer goods imports slumped from 25.8% in March to just 2.83% in April. (Figure 2, lowest graph)

Agri-based products—led by coconut and sugar—boosted exports.

C. Headline and Core CPI: More Evidence of Demand Weakness

Headline CPI slipped from 1.4% in April to 1.3% in May, mainly due to quasi-price controls known as Maximum Suggested Retail Prices (MSRP) on rice and pork. The government also began rolling out Php 20 rice subsidies in select areas, distributing them among targeted groups.

Figure 3

However, Core CPI (non-food and non-energy) steadied at 2.2% for a third straight month, backed by a base-forming month-over-month rate of 0.16%—marking a second consecutive month. A soft CORE CPI reflects underlying weakness in demand. (Figure 3, topmost image)

D. Labor Market Deterioration, Hidden Labor Market Realities

Labor data reveals further vulnerabilities. The unemployment rate rose from 3.9% in March to 4.1% in April, but this excludes an estimated 24 million “functionally illiterate workers” (47% of the labor force or 30% of the population aged 15 and above). Many of these workers are likely employed in the informal sector or MSMEs (67% of employment in 2023, per DTI) or are underemployed, part-time, or not in the labor force. 

The “not in the labor force” population, defined by the PSA as those not seeking work due to reasons like housekeeping or schooling or permanent disability, has risen since November 2022, potentially masking the true unemployment rate and raises questions about the true extent of labor underutilization. (Figure 3, middle chart) 

The correlation between universal-commercial bank consumer salary loans and CPI trend since 2021 highlights consumer strain, further eroding aggregate demand. (Figure 3, lowest diagram) 

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain 

Amidst all of this, we must ask: what has happened to "aggregate demand," particularly consumer demand? If consumers have shown worsening strains at the start of Q2, its continuity bodes ill for GDP growth and could likely be expressed in potential shortfalls in tax collections. 

So how will the government attempt to keep the GDP afloat? Given their top-down bias, the mechanical recourse would be to front-load public spending, thereby heightening the risks of a fiscal deficit blowout! 

Naturally, because the government is not a wealth generator but rather a redistributor and consumer, someone has to finance that swelling deficit. That "someone" is the individuals in the wealth-generating productive private sector. 

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

Figure 4 

With the first four-month deficit at a record high of Php 411.5 billion, authorities raised Php 155.61 billion in April, leading to a 190% spike in financing of Php 799.73 billion in 2025. This effectively reversed the three-year (2021-2024) decline previously hailed by mainstream experts as prudential management. (Figure 4, topmost window)

The financing surge increased BTr's cash reserves to Php 1.205 trillion (Jan-Apr), though authorities held net cash reserves of only Php 188.9 billion in April. 

April's financing was mostly acquired through domestic issuance.

B. Debt Payment Dynamics 

April debt payments soared 73.72% to Php 280.898 billion, accruing to Php 622.921 billion in the first four months of 2025. (Figure 4, middle image) 

Total debt payments remained 45.7% below 2024's record levels. However, FX payments grew 17.3%, partly offsetting the 59.64% plunge in peso payments.

The FX share of debt servicing relative to the total has been rising since 2024. (Figure 4, lowest chart) 

The lag in payment data may be due to scheduling issues or information deliberately withheld for political reasons. 

While we find the preponderance of media announcements showing how debt payment has substantially slowed this year rather amusing, logic dictates that widening deficits will lead to a critical increase in debt that will have to be serviced over time. 

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition 

April debt hit a record Php 16.753 trillion. Thanks to a strong peso, FX-denominated loans fell 2.7% or Php 142.33 billion. 

Per Bureau of Treasury (BTr): "The reduction was primarily due to the P124.74 billion decrease in the peso value of external debt owing to peso appreciation." 

However, domestic debt grew 1.85% or Php 211 billion, resulting in a net increase of 0.41% or Php 68.690 billion. 

Reality Check: Philippine foreign debt did not actually shrink. The peso simply strengthened, lowering the debt's peso equivalent. Remember, FX liabilities still have to be repaid in dollars or other foreign currencies. In short, it's a revaluation trick—a statistical façade, not a real debt decrease. 

X. Crowding Out Effect and Interest Rate Pressures

Figure 5

In any case, the widening deficit, brought about by the mismatch between accelerating public spending and weakening revenue growth, underwrites the escalation of public debt. The rise in public debt has already been outpacing the growth trend of public spending, driven by the deficit and likely by amortization requirements. (Figure 5, topmost pane)

This escalating fiscal deficit means that competition for access to the public's diminishing savings will intensify, as government requirements will likely crowd out the domestic credit needs of banks and non-private sector firms, thereby putting pressure on interest rates. For businesses, this translates to higher borrowing costs and reduced access to credit, potentially stifling private sector investment and job creation. For ordinary citizens, it could mean higher interest rates on loans for homes, cars, or personal consumption. 

As an aside, the relentless rise in debt levels is not only a manifestation of the consequences of the government-BSP's "trickle-down" policies (debt-financed "savings-investment gap," "twin deficits," and "build and they will come" malinvestments); critically, they also signify the indirect ramifications of the Philippine social democratic system. In essence, this is what you have voted for! 

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing 

So, despite authorities' earnest attempts to push down the CPI—mainly via price controls or Maximum Suggested Retail Prices (MSRP) for rice and pork—to accommodate a desired easing cycle, T-bill rates have barely budged since 2022!  (Figure 5, middle chart) 

T-bills, the most sensitive to BSP's rate cuts, have remained unresponsive to April's CPI data! 

The widening spread between market (T-bills) and the CPI suggests that, aside from the crowding-out effect, Treasury markets view the present disinflation as "transitory," or they are hardly convinced of the integrity of the government's data. 

Consider this: The punditry consensus has been clamoring for lower rates on the back of a slumping CPI, but treasury dealers for their companies continue to price Treasuries as if the CPI remains inordinately high!

In short, the crowding out has rendered the government-BSP's easing cycle ineffective: Fiscal stimulus has hit a wall due to diminishing returns!

At worst, the mounting discrepancy could translate into increasing policy risks—or a potential blowback—that could be expressed through an inflation surge or a USD/PHP spike.

As seen in banks' balance sheets, this crowding out has led to a plunge in their liquidity positions (evidenced by falling cash-to-deposits and liquid assets-to-deposits ratios).

This increasing demand for public savings also applies to foreign exchange (FX) requirements. This means that to meet the economy's foreign exchange (FX) requirements and support the BSP's "soft peg" or foreign exchange policy, a surge in external debt can be expected. 

Evidently, public savings have not been sufficient. Authorities have increasingly relied on banks to finance public requirements via net claims on the central government (NCoCG), which have been rising in tandem with public debt. These assets have been siloed via banks' held-to-maturity (HTM) assets. The all-time high in public debt has been accompanied by a near-record NCoCG in April. (Figure 5, lowest diagram)

Figure 6

It is unsurprising that trades in government securities have been booming, even as 10-year yields have been on an uptrend. (Figure 6, topmost diagram) 

This phenomenon suggests two things: potential disguised losses in banks and financial institutions, and second, that these trades have crowded out trading activities in the Philippine Stock Exchange (PSE). 

In 2020, the BSP's historic Php 2.3 trillion intervention occurred partly via its own NCoCG, which is conventionally known as "quantitative easing." Although the present economy has supposedly ‘normalized,” the BSP's NCoCG remains at 2020 levels. This can be expected to surge when public savings and banks' capacity have reached their maximum. (Figure 6, middle image) 

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time. 

We doubt if they can maintain the USD/PHP peg or if they would accommodate a limited peso devaluation. 

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

With this in mind, we can expect both public debt and debt servicing to experience an accelerated rise. Public debt to GDP could hit 2003-2004 levels, while debt servicing should see an equivalent uptrend over the coming years. (Figure 6, lowest chart) 

We should not forget: rising public debt inevitably leads to higher debt servicing, which in turn necessitates more public spending. 

As noted last May 

This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted:

-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop. 

-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures. 

-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral. 

-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation 

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)

Following this, after grappling with debt and inflation, the government is bound to raise taxes. 

XIII. Conclusion: Fiscal Shock Watch 2025 

Unless BSP’s easing gains real economic traction, the first four months of 2025 point to a growing likelihood of a fiscal shock. 

• Revenue collection has deteriorated.
• Economic indicators signal fragility.
• Consumers are heavily indebted and weakening.
• External pressures—Trump's tariffs, deglobalization, and the re-emergence of "bond vigilantes" (investors who sell off government bonds when they believe fiscal policies are unsustainable, thus driving up borrowing costs for the government) could tighten external liquidity and worsen domestic financial conditions. 

Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026. 

If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate.

___

References 

Prudent Investor Newsletter, Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm, May 18, 2025 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, May 4, 2025

 

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

An election is a moral horror, as bad as a battle except for blood; a mud bath for every soul concerned in it—George Bernard Shaw

In this issue

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

I. US Election Narrative: Fear the Trump Trade!

II. Market Chaos Erupts after Fed’s September Rate Cut

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

V. The Biden-Harris Legacy of "Proxy Wars"

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

Fear the Trump Trade or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us 

Is the "Trump Trade" responsible for recent market convulsions, or does this represent a pushback against the Fed’s actions? Why political-economic trends in motion tend to stay in motion. 

I. US Election Narrative: Fear the Trump Trade!

Trump's Rising Election Odds Sends Emerging Markets Into Tailspin, Causes Biggest Stock Drop In 10 Months (Yahoo, October 27) 

The Bangko Sentral ng Pilipinas (BSP) might have to do more to support the Philippine economy if former US President Donald Trump returns to power and starts a global trade war, which can hurt the entire world and, in turn, dim local growth prospects. (Inquirer.net, October 28, 2024) 

THE RETURN of Donald J. Trump to the US presidency could cause Asian currencies such as the Philippine peso to weaken, analysts said. (Businessworld, October 29, 2024) 

At first glance, it may seem that the following headlines or excerpts were conveyed for Halloween. 

Then, I realized that the U.S. elections are coming up this week. 

Mainstream media has painted an impression that the recent setbacks in the marketplace mean that a Trump win/presidency, or the "Trump Trade," could be detrimental to the markets. 

Let us examine what led to this perspective. 

In October, the Bloomberg spot U.S. dollar index surged by nearly 3% compared to the previous month. The S&P 500 slipped by 0.99%, the iShares MSCI Emerging Market ETF (EEM) dived by 3.07%, and the Global X FTSE ASEAN ETF (ASEA) tanked by 3.9%. The U.S. 10-year Treasury yield surged by 48 basis points (12.7%). 

Meanwhile, at home, the Philippine peso plunged by 3.6%, and the PSEi 30 plummeted by 1.78%. 

The prevailing sentiment in the speculative marketplace has shifted from excessive optimism to risk aversion.

Who else to blame but the leading contender in the prediction markets, Trump!

II. Market Chaos Erupts after Fed’s September Rate Cut 

But does this widely accepted perception accurately reflect causation, or is it intended to shift the Overton Window in favor of the opposing contender, Kamala Harris?

Figure 1 

The rising 10-year yield actually started just after the US Federal Reserve initiated its 50-basis-point rate cut on September 18th. (Figure 1, topmost chart)

It is rare to witness such a combination of powerful forces ripple through other market indicators.

Figure 2

Rising Treasury yields have been accompanied by an appreciating U.S. dollar index, which has also contributed to increased volatility in the bond market (MOVE Index) and volatility premiums across asset markets—including equities, oil, and foreign exchange—as well as a spike in U.S. Credit Default Swaps (CDS). (Figure 1, middle and lower graphs, Figure 2 topmost and lower images)

Figure 3

This dynamic coincided with a spike in the Economic Surprise Index and gold's widening outperformance against the TLT iShares 20-Year U.S. Treasury bond prices. (Figure 3, middle topmost and middle visuals) 

Incredible. 

The most striking indicator of the impact of the Fed's rate-cutting cycle that began in September is that it occurred under the loosest financial conditions since at least December 2022. (Figure 3, lowest diagram) 

In other words, global financial markets have significantly pushed back against the Fed’s easing policy by effectively re-tightening conditions! 

Of course, one could interpret this as "buy the rumor, sell the news." 

Still, other factors are at play—such as unrestrained public spending, surging debt levels, escalating debt servicing costs, geopolitics and more!

Nevertheless, resonating with the "Overton Window" during the pandemic in support of lockdowns and vaccines, the Gramsci-cult elite-controlled media shifted the rhetoric to blame Trump’s predilection for tariffs.

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card 

First and foremost, yes, while it is true that global trade restrictions did rise in during Trump 1.0 (2017-2021) regime, his successors, the Biden-Harris tandem, pushed for MORE trade barriers, which hit a record high in at least 2022! 

Figure 4

As the IMF chart reveals, the global economic conflict spans both parties, with both candidates appearing inclined toward de-globalization. 

(Note this shouldn’t be seen in a simplistic lens but related to geopolitical developments) 

Second, financial easing amidst the loosest monetary conditions translates to a potential comeback of inflation, which aligns with the perspective that Trump’s trade war results in higher inflation. 

However, that shouldn’t hold water; inflation under Trump’s administration was milder than the inflation epidemic during the Biden-Harris administration. 

Consequently, with higher inflation came higher interest rates as well. 

Third, Trump’s push for tariffs represents a carryover from his 2016 campaign trail. 

He used tariffs as leverage for negotiation but eased up on strict currency regulations, as noted in this Yahoo article. 

Trump has likened his tariff plan to a new "ring around the collar" of the US, with tariffs often described not as part of negotiations but with those high duties as an end goal in themselves to protect US industry… 

He promised during that campaign to impose tariffs, renegotiate NAFTA, and withdraw from the Trans-Pacific Partnership. "Promise kept," PolitiFact said of all three. 

Trump also took action on a fourth promise to declare China a currency manipulator but ended up compromising, according to the group. 

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

Figure 5

Fourth, stock markets haven’t been exactly hostile to Trump.

The ASEAN ETF (ASEA) reached an all-time high in 2018 or during the early phase of his administration, and the Emerging Markets ETF (EEM) also hit a milestone that year and also surged to a fresh record toward the close of Trump’s term. Both markets, however, eventually succumbed to the pandemic recession.

Similarly, the Philippine PSEi 30 hit a significant peak in January 2018, also coinciding with Trump’s administration.

On the currency front, the Philippine peso rallied from October 2018 to the end of 2021.

In fact, contrary to contemporary analysis, the USDPHP fell by 3.7% from January 20, 2017, to January 20, 2021 (Trump’s tenure).

In contrast, under the Biden-Harris administration, the USDPHP has increased by an astounding 21% from January 20, 2021, to the present (October 31, 2024)!

While past performance does not guarantee future outcomes, the scorecard between the contending parties shows a stark difference in the accuracy of the current predominating narratives. 

In a word, propaganda. 

Nota Bene: Past performance is not a guarantee of future results. Our purpose is to highlight inaccuracies in media claims. We don’t endorse any candidates. 

V. The Biden-Harris Legacy of "Proxy Wars"

Fifth, the world is on the brink of, or already embroiled in, a form of World War III, fought across multiple spheres. 

The U.S. suffered a humiliating defeat in the 20-year Afghanistan War, ultimately withdrawing in the face of a relentless war of attrition led by the Taliban’s guerilla tactics. Both the Trump and Biden administrations negotiated withdrawal terms, but the Biden-Harris administration oversaw a controversial chaotic exit in August 2021. 

That aside, a series of conflicts has marked the Biden-Harris administration’s legacy. 

The kinetic conflict began with the Russia-Ukraine war in 2022, spread to the Israel-Palestine/Hamas war in 2023, and has since escalated to include confrontations involving Israel-Hezbollah or the "Third Lebanon War," and even the precursory phase of Israel-Iran Conflict in 2024. 

Simultaneously, following Obama’s failed "Pivot to Asia," geopolitical tensions have been mounting in the Taiwan Straits, the South China Sea, Central Asia, and other parts of the world. 

Notably, these ongoing and emerging conflicts are interconnected.

For example, the U.S. has been supplying not only aid but also arms to its allies to counter hegemonic rivals.

Figure 6

Aside from supplying 70% of conventional weapons, U.S. military aid/grants to Israel soared to all-time highs in 2024! (Figure 6, topmost chart)

That is to say, the current conflicts represent "proxy wars" where the U.S. led NATO forces engage indirectly to pursue hegemonic objectives.

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

The Global Warfare has also entered the economic and financial spheres—seen in the weaponization of the U.S. dollar through asset confiscations targeting so-called "axis of evil" nations, and in the reinforcement of a modern-day "Iron Curtain" marked by significant restrictions on trade, investments, capital flows, and social mobility.

Mounting trade imbalances, which helped fuel the rise in trade barriers from the Trump administration to Biden-Harris, have also laid the groundwork for today’s outbreak of kinetic conflicts.

Geopolitical tensions have surfaced as a growing cold war in other regions as well.

This hegemonic competition to expand sphere of influences has percolated to Africa, Latin America, the South Pacific, and the Global South (BRICs), some of which channeled through mercenary or gang wars and local civil wars. (Dr. Malmgren, 2024)

Ironically, four of the five ASEAN majors, specifically, Indonesia, Thailand, Malaysia and Vietnam recently signed up for the BRICs membership.

The implicit cold war has also extended into previously uncharted areas: underwater territories, space, the Arctic, the Pacific, mineral resources (like rare earth elements), and technological domains such as DNA research, cyberspace, and microchips (Malmgren, 2023).

The point is that these evolving conflicts underscore the interconnectedness of U.S. foreign and domestic policy.

Given the powerful forces behind this trajectory or the "deep state"—including the Military-Industrial Complex, the National Security State, Straussian neoconservatives promoting the "Wolfowitz Doctrine," the energy industrial complex, Big Tech, and Wall Street—it is unlikely these developments will cease, whether under a Trump 2.0 administration or (Biden carryover through) a Harris regime.

Put simply, while media narratives may further lobotomize or impair the public’s critical thinking, potentially deepening societal division, a meaningful change in the U.S. and global sociopolitical and economic landscape remains unlikely if elections continue to focus on what I call as "personality-based politics."

As investor-philosopher Doug Casey rightly observed, "Trends in motion tend to stay in motion until they reach a crisis."

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

Lastly, the public tends to overlook that current trends are merely symptoms of deeper issues or mounting disorders stemming from the decadent U.S. dollar standard.

As investor Doug Noland astutely wrote 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold. It bears repeating: Things turn crazy at the end of cycles. (bold mine) [Noland, 2024] 

Easy money has long fueled, or been instrumental in financing, the global war machine, leading to today's bellicose conditions.

Easy money has also powered the growth of big government and contributed to economic bubbles and their eventual backlash, as evidenced by China’s unparalleled panicked bailout policies to prevent a confidence crisis from imploding. 

The push for easy money is likely to persist, whether under a Trump 2.0 or a Harris administration. 

As Professor William Anderson noted, 

The unhappy truth is that both platforms will need the Federal Reserve System to expand its easy money policies, despite the massive damage the Fed has already done by bringing back inflation. While Harris claims to defer to the “experts” at the Fed, Trump wants the president to have more power to set interest rates. Obviously, neither candidate is acknowledging the economically perilous situation in which the government ramps up spending, which distorts the markets, and then depends upon the Fed to monetize the resulting federal deficits. As the debt grows and the economy becomes progressively less responsive to financial stimulus, the threat of stagflation grows. The present path of government borrowing and spending all but guarantees this outcome, and the candidates have neither the political will nor the economic understanding to do what needs to be done. (Anderson, 2024) 

U.S. debt is fast approaching $36 trillion, while global debt reached $315 trillion in Q2 2024 and counting. (Figure 6, middle and lower charts) 

"Trends in motion tend to stay in motion until they reach a crisis."

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

While the "Trump trade" provides a convenient pretext for the current tremors in the global financial market, this narrative relies on inaccurate premises and misleading speculative claims that are unsupported by empirical evidence. Instead, these assertions aim to sway the voting audience ahead of this week’s elections. 

In contrast, the current financial market convulsions reflect a significant pushback against the Fed’s and global central banks’ prolonged easy-money policies. As investor Louis Gave of Gavekal recently noted, "Zero rates were a historical aberration that need not be repeated." 

Needless to say, regardless of who wins the U.S. presidency, political agendas will continue to advocate for easy money and various forms of social entropy and conflict. 

Unfortunately, there is no such thing as free lunch forever. 

Although trends in motion tend to stay in motion, the era of the bond vigilantes is upon us.  

Things have been turning a whole lot crazy. 

___

References 

Yahoo Finance, What Trump promised in 2016 on tariffs. And what he delivered (a lot). October 28, 2024, 

Dr. Pippa Malmgren The Cold War in Hot Places, March 12, 2024 

Dr. Pippa Malmgren WWIII: Winning the Peace, October 28, 2023 drpippa.substack.com 

Doug Noland, Vigilantes Mobilizing, Credit Bubble Bulletin, November 1,2024 

William L. Anderson  The Great Retreat: How Trump and Harris Are Looking Backward, August 30, 2024 Mises.org 

Louis-Vincent Gave, Behind The Bond Sell-Off, Evergreen Gavekal October 31, 2024

Treasury or Bond Vigilantes Return with a Vengeance, Compels the BSP to Implement its First Rate Hike!

 

Governments resist austerity. Politicians buy votes with spending. But because they do not control their domestic currency systems in Europe, they must rely on borrowing and taxes to fund their spending. They cannot call their respective central banks and demand that the banks buy bonds by means of newly created fiat money. This puts them at the mercy of bond buyers, who are notoriously unmerciful. They have their own bond vigilantes. These investors can veto plans of politicians by refusing to lend at low interest rates. By holding out, they force the politicians to pay higher interest rates. Politicians hate that. If rates go too high, this can cause a recession. Politicians prefer to conceal this by having a central bank become the lender of last resort—Gary North 

 

In this issue: 

 

Treasury or Bond Vigilantes Return with a Vengeance, Compels the BSP to Implement its First Rate Hike! 

I. Treasury Vigilantes Compel the BSP to Implement its First of a Series of Rate Hikes!  

II. Why is the BSP Dithering to Tighten? 

III. HTM Shoots to the Moon as Banks Conceal Trading Losses! Q1 2022 Accounting Profits Up 26% 

IV. Tightening Liquidity: Bump on Money Supply Growth? Public Spending Spree? Treasury Vigilantes are Back with a Vengeance! 

 

Treasury or Bond Vigilantes Return with a Vengeance, Compels the BSP to Implement its First Rate Hike! 

 

I. Treasury Vigilantes Compel the BSP to Implement its First of a Series of Rate Hikes!  

 

The BSP finally relented. It reluctantly raised its policy rates by 25 bps last Thursday, May 19th. 

  

The 25 bps, which represent a baby step, signals its reluctance.  

  

Before this, the BSP used the signaling channel to broadcast its proposed action.  

 

Excerpted from several articles are the rationalizations for its actions. (all bold mine) 

 

GMA News, May 18: Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno has indicated that there is now less space for an accommodative monetary policy, but any changes should be conducted in a timely manner. Diokno on Wednesday said that while inflation pressures have been linked mainly to supply-side factors, which are best addressed by non-monetary interventions, secondary effects are starting to manifest. "The space for maintaining an accommodative policy stance has considerably narrowed given how the April 2022 inflation of 4.9% settled near the higher end of the BSP's forecast range," he said. 

 

Inquirer, May 19: BSP Governor Benjamin Diokno on Wednesday noted that headline inflation, after having breached the target band of 2 percent to 4 percent in April at 4.9 percent year-on-year, is expected to remain higher than desired. At the same time, Diokno said that along with the higher-than-expected 8.3-percent growth rate of Philippine gross domestic product in the first quarter, second-round effects—particularly wage hikes—were starting to manifest themselves. 

 

Last March, we noted that…  

 

The BSP adamantly refused to budge from its historically low rates stance because of the following perceived advantages: to sustain the rescue of the banking system via repressed deposit rates, increase bank credit transactions, bloat the GDP, expand prospects of higher tax collection, subsidize the government and borrowers through a negative "real" rates regime (financial repression), and contain the FX exchange rates. 

 

Keeping policy rates at a historic low is a function of politics primarily, before economics.   

 

By putting a cap on the rise of the CPI, the BSP hoped to contain interest rates from rising.  

 

See Despite Lower September CPI, Philippine Treasury Yields Soar, Spreads Steepen! Greenflation Implodes the ESG Bubble! October 10, 2021 

 

See Cracks on the BSP’s Credibility: Treasury Yields Flatten! PLDT to Take Defensive Posture from Higher Debt and Financing Costs March 27, 2022 

 

 

Figure 1 

 

 As we would argue, always check the treasury markets! 

 

We barely hear from them; rather, we see their actions. 

  

The sustained selloff or the surging yields exhibits that the treasury markets have (totally) ignored or dismissed the CPI data of the PSA.  

 

More significantly, it has exposed the BSP as blatantly "behind the curve."  (Figure 1, highest pane)  

 

The spread between the benchmark 10-year PDS yield and the official repo rate has soared past the 2018 highs! The treasury markets have priced in the CPI as exceeding the September and October 2018 highs of 6.7%!  

 

In 2018, the panicked BSP responded dramatically to the surging yields with a 175 bps hike in 7-months! Yes, seven months. It is why some predict the BSP would hike by as much.  

 

But again, the spreads and the level of debt are beyond this level. The economic and financial conditions are likewise dissimilar. (Bank bailout measures tell us more on this) The thing is, this is not 2018! 

  

Further, the effectiveness of zero-bound rates as a rescue measure for the banking system has been fading. 

 

Rising 10-year yields have filtered into the diminishing deficit of bank interest expenses. Deflation in bank interest expenses slowed to 10.7% YoY in Q1 2022 from 34.7% YoY in Q4 2021. (Figure 1, middle pane) 

 

Or, rising yields also expose the diminishing returns of the BSP subsidies represented by zero-bound rates on the banking system.  

  

In short order, the Treasury markets have been driving the policies of the BSP more than the other way around! 

 

And unless the BSP gets ahead, street inflation will only escalate. 

 

In the 80s, independent analyst Ed Yardeni once coined the term bond vigilantes, describing the bond markets' demand for higher yields to protest monetary or fiscal policies. 

 

The Treasury vigilantes are putting a kibosh on both of them.  

 

II. Why is the BSP Dithering to Tighten? 

 

The simple answer: higher rates will expose malinvestments. 

 

Responding to the BSP announcement, led by the 2-year, short to medium-term bonds, spiked the most. (Figure 1: lowest pane) 

 

In this respect, the BSP has yet to persuade and placate the treasury markets that it has the mettle to take the plunge.  

 

And it is logically awkward to pin the blame on the supply side when it has been touting the GDP performance of the last two quarters to 'domestic demand.'  

 

So the driver for the GDP is 'domestic demand' while the CPI is 'supply'? And real GDP is calculated to include the effects of the CPI? That's an example of putting a square peg in a round hole! Awesome logic. 

 

And their premise is that election and other public spending measures, and the recent growth in bank credit, are factors isolated from demand. 

 

As a side note, here is what we wrote on public spending in April… (emphasis original) 

 

But our hunch is that deficit spending will be most aggressive on the candidates backed by the most vested interest groups. 

 

See Deficit Spending Remains a Core Agenda, The Significance of Public Debate of Candidates for the National Leadership  April 4, 2022 

 

Clearly, the political division of economic spoils is coming. 

 

Inquirer, May 19: The 19th Congress is eyeing to pass a stimulus bill titled “Bayan Bangon Muli (BBM)” as well as reschedule the barangay elections set this December in order to save P8 billion which could be used to fight the pandemic. 

 

That should signify the appetizer. See below for further discussion.  

But why is the BSP dithering? 

 

The banking system remains on the BSP lifeline.  The BSP's operational and regulatory relief measures for the industry remain in place.  

 

The BSP extended the applicability of these measures until December 2022.   

 

That said, the financial conditions of the industry, as published by the BSP, are not the same relative to the pre-pandemic era. It would represent a categorical error to compare (improved) present conditions with the past.  

 

So the leniency in reporting and regulatory supervision or the dramatic easing in the regulatory regime sugarcoats its actual conditions.  

 

More importantly, such politically induced rescue efforts foster a moral hazard and dependency problem for the industry.  

 

We cited this in February… 

 

Risks are not extinguished by statistical camouflaging. Instead, the lack of transparency magnifies it. 

 

The World Bank enumerated some factors that drive institutional risks from such forbearance policies: The lack of transparency increases the opacity and complexity of public balance sheets. It weakens trust that may lead to diminished investments. And it may delay the resolution of non-performing loans, thereby decreasing the capacity of financial institutions to lend to creditworthy borrowers. 

 

But the World Bank missed the more important ones: Moral hazard, dependency, and corruption.  These ethical issues may metamorphose into technical issues. 

 

See Kaboom! The World Bank Warns of Hidden Risks in the Philippine Financial System! February 20, 2022 

 

In short, aside from liquidity injections, the BSP camouflages the increased fragility of the banking system through lax surveillance and reporting or its rescue policy of non-transparency. 

 

Figure 2 

 

Its hesitance to normalize rates also represents the rear-view mirror effect.  

 

Raging street inflation, mainly through the rice crisis, pulled down bank lending in 2018. (Figure 2, upper window) 

 

Net NPLs accelerated upwards along with the surge in Treasury yields in 2018. (Figure 2, lower pane) 

 

In essence, higher rates expose the facade of a supposedly "sound macro-economy!" 

 

III. HTM Shoots to the Moon as Banks Conceal Trading Losses! Q1 2022 Accounting Profits Up 26% 

 

And there is more. 

 

There have been unintended consequences to its zero-bound policy on the banking industry.  

 

Figure 3 

 

In 2018, the use of held-to-maturity (HTM) assets to disguise mark-to-market losses soared. And yes, even while 10-year yields haven't reached 2018 watermarks, HTM assets in Q1 2022 have skyrocketed! (Figure 3, highest pane) 

 

It presently transcends the 2018 levels! 

 

And that's because banks have shifted their core operations from lending to speculation. That's aside from their joint efforts with the BSP to finance public debt. 

 

The share of investments to total assets has rocketed to a 10-year high of 28.68%. (Figure 3, middle window) Yet, despite the record investments, market losses continue to mount. 

 

Accumulated market losses swelled to a record Php 54.6 billion in March 2022. And that excludes the HTMs! (Figure 3, lowest window) 

 

Figure 4 

Nonetheless, banks posted a 26% YoY increase in profits from lower deposit expense subsidies, higher interest rate margins, and higher lending and non-interest income from fees and commission. (Figure 4, topmost pane) 

 

The record swelling of HTMs helped siphoned cash off the banking system, which suffered an 11.8% deflation in March. (Figure 4, middle pane) 

 

Moreover, the BSP embarked on pruning its QE.   

 

GMA News, May 20: More than a month before the Duterte administration steps down, the national government has paid in full its P300-billion loan with the Bangko Sentral ng Pilipinas (BSP) on Friday morning, the Department of Finance (DOF) said. In a statement, the DOF said the national government settled the P300-billion provisional advances to the central way ahead of its actual maturity date of June 11, 2022. 

 

From the end of 2021, BSP net claims on the central government diminished by Php 387 billion last March. The BSP further reduced Php 99 billion for an accrued Php 486.8 billion YTD. (Figure 4, lowest window) 

 

The rate of growth of the net claims on the central government through banks also slowed.  

  

The liquidity reduction operations by the BSP and banks also reduced deposit liabilities, evidenced by the sharp slowdown in peso deposit growth.  

 

Deposit liabilities, the primary source of bank lending, expanded 7.15% in March, its lowest growth rate since July 2021.  

 

Peso liabilities, which also grew by 6.51%, an October 2019 low, pulled it lower.  

 

Meanwhile, FX deposits are surging.  It expanded 10.9% in March, its fastest rate since May 2018.  

  

Is the public seeking a haven via a shift from the peso to FX deposits? 

 

IV. Tightening Liquidity: Bump on Money Supply Growth? Public Spending Spree? Treasury Vigilantes are Back with a Vengeance! 

 

Figure 5 

Despite the massive growth in cash in circulation to finance election spending, M3 growth appears to have stalled, and its growth rate may have plateaued since the 3Q 2021, which further points to a tightening liquidity backdrop. (Figure 5, topmost pane) 

 

The Treasury vigilantes have also been confirming this view.  

 

With the 5-year yield rising faster, the spread of the 20- and 5-year continues to exhibit a narrowing. From the belly or 5-year bonds, the treasury markets are exhibiting symptoms of a bearish flattener! (Figure 5, middle window) 

  

Not only are we going to see a shift in the fundamental economics of credit, but repricing, collateral, and counterparty issues will all come into play.   

 

Once again, with public spending and fiscal deficits drifting at record levels, financing these should be a spectacle.  (Figure 5, lowest pane) 

 

Or, with the BSP trimming its support momentarily, how will the incoming regime finance its proposed signature 'stimulus'?  

 

Will they increase competition with banks and non-financial institutions for access to public savings at a much higher rate than the present?  

 

Unless one believes in economic unicorns, how should this 'crowding out' transpose into economic growth or advancement?  

 

The treasury vigilantes have, once again, been showing the opposite of the consensus view on the economy. 

 

At day's end, there is no such thing as a free lunch.  

 

The treasury/bond vigilantes are back with a vengeance!   

 

And they appear to be on the path of imposing rigorous discipline on the political economy and the markets, substantially distorted by the free lunch premised Keynesian policies of the BSP in support of the neo-socialist (neo-fascist) state.   

 

Yours in liberty, 

 

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