Q3 2024: Philippine Real Estate Enters Deflationary Spiral Post-Pandemic Recession!

 

The total wealth of a country is the total value of goods and services it produces. When real estate prices rise much faster than this value, there has effectively been a large wealth transfer from those who don't own real estate to those who do—Michael Pettis 

In this issue: 

Q3 2024: Philippine Real Estate Enters Deflationary Spiral Post-Pandemic Recession!

I. Q3 2024: Philippine Real Estate Sees First Deflationary Spiral Since the Pandemic Recession! 

II. A Brief Insight into the Differences Between Pandemic-Recession Real Estate Deflation and Today’s Economic Landscape 

III. Despite Declines in New Housing Loans, Total Real Estate Consumer and Supply-Side Loans Surge, Unaffected by High Cap Rates 

IV. Real Estate’s Falling GDP Contribution and Increased Bank Lending Share Point to Heightened Concentration Risks 

V. Q3 2024 Real Estate Deflation Means Lower Sectoral and National GDP; Slower Retail Sales Amidst Greater Supply Side Expansion Translates to More Vacancies 

VI. Real Estate Deflation Amidst Near Full-Employment? What Happens When Unemployment Soars? 

VII. Property Sector Woes: From Price Deflation to Income Losses and Increased Debt Loads 

VIII. Property Sector Woes: From Liquidity Strains to Soaring Bank NPLs? 

IX. Will the BSP Launch QE 2.0 Soon? 

X. Conclusion: Two Ways to Bankruptcy: Gradually, then Suddenly

Q3 2024: Philippine Real Estate Enters Deflationary Spiral Post-Pandemic Recession! 

Philippine real estate prices experienced their first deflationary spiral in Q3 2024 since the pandemic recession, highlighting worsening imbalances in the sector. We explore the potential economic implications and possible policy responses. 

I. Q3 2024: Philippine Real Estate Sees First Deflationary Spiral Since the Pandemic Recession!

The Philippine consumer economy is hurting—and hurting badly. 

This pain is being reflected across several fronts, including the country’s most popular investment: real estate. 

Businessworld, December 30: HOUSING PRICES nationwide declined in the third quarter, the first contraction in over three years, data from the Bangko Sentral ng Pilipinas (BSP) showed. The Residential Real Estate Price Index (RREPI) fell by 2.3% year on year in the July-to-September period. This was a reversal of the 2.7% growth in the second quarter and 12.9% expansion in the same period a year ago. This was also the first time the RREPI posted a decline since the 9.4% drop recorded in the second quarter of 2021. (bold added)

And more news excerpts (all bold mine)

GMANews.com December 12, 2024: The oversupply of condominium units has shot up to an equivalent of 34 months as of November amid the sudden increase in availability of units, according to data released by Leechiu Property Consultants (LPC)… There were 4,971 new units launched in October and November, versus the 4,375 units sold during the period. Year-to-date, condominium take up was recorded at 25,565 units, equivalent to 63% of that recorded in the comparable period of 2023 while project launches stood at 13,226 or half of the previous year. Golez earlier also noted that the oversupply was due to a mix of high interest rates and external concerns, as well as a shift in preference to single-detached homes and properties in nearby provinces. 

Inquirer.net November 16, 2024: Vacancies in Metro Manila’s prime and grade A office market hit a 20-year high as of the end of the third quarter this year, with rental rates declining for the fourth straight quarter. A report from global commercial real estate services firm Cushman and Wakefield puts the average office vacancy rate at 18.2 percent, the highest since the second quarter of 2004. “The Metro Manila office market is exhibiting a slower-than-expected recovery in Q3 2024,” Cushman & Wakefield director and head of tenant advisory group Tetet Castro said in a statement.

Businessworld, November 12, 2024: DEMAND for office space outside Metro Manila has been “less robust” as office occupiers now have smaller space requirements, real estate services firm JLL Philippines said. “After the pandemic, I think the demand has weakened in general because for the key cities outside Metro Manila like Cebu and Iloilo, we’re still seeing a bit of takeup, but for the other peripheral areas, it’s not as robust anymore,” JLL Philippines Head of Research and Strategic Consulting Jan-Loven C. de los Reyes said at a briefing last week…

Businessworld, October 30, 2024: THE OFFICE VACANCY rate in Metro Manila is projected to reach 20.5% by the end of the year, driven by the influx of new office space and the departure of Philippine offshore gaming operators (POGOs), according to property consultancy firm Colliers Philippines…As of the end of the third quarter, Colliers data showed that office space vacancy rose to 18.6% from 18.3% the previous quarter due to space resulting from POGO lease terminations and non-renewal of pre-pandemic leases.

My Initial Insights: 

1. Polls indicate that the challenges faced in Q3 are likely to extend throughout the rest of 2024 and beyond. 

2. Mounting mismatches between weakening demand and rising supply have led to either increasing vacancies or a glut. 

3. Even the most bullish industry advisors have been forced to admit or confront the harsh reality facing the sector. However, they often put on a cosmetic face or a polished façade, promoting hope of recovery with little explanation beyond reliance on GDP growth. 

4. While real estate prices may seem "sticky," they are actually sensitive to liquidity and interest rates. Consequently, price declines reflect intensifying liquidity strains. In other words, vacancies have drained liquidity from many leveraged landlords and real estate owners, forcing them to sell properties at lower prices. 

5. The inflationary boom has morphed into a deflationary bust, where fear has replaced greed. 

6. Mainstream thinking has consistently overlooked the root of the issue: trickle-down policies that foster a "build-and-they-will-come" ideology, relying on the assumption of perpetual credit-driven demand fueled by low inflation and interest rates-or an everlasting regime of easy money.

Although we have been addressing this topic for some time, I will be quoting extensively from my May 2023 article: (bold and italics original)

There has been little realization that the industry has invested primarily in the foundation of the so-called "integrated community structure," anchored on urbanization and its extension of "satellite communities." 

Espousing the contortion of Say's Law, "supply creates its own demand," through "build and they will come," the race to build became the industry’s bedrock. 

Yet, the dynamic preference of consumers became one of the challenges of this model. 

And so, influenced by digitalization and pandemic policies, the transformation to hybrid/remote work has rendered a massive "sunk cost" or capital decumulation—signified by oversupply.  

… 

The thing is, though office spaces are the concern here, all other segments of the property sector constitute part of such "integrated communities," which therefore extrapolates to interconnection.  

By extension, it also means that the paradigm of "integrated community" is codependent not only on the vibrancy of the office properties but also residential, shopping malls, hotels, logistics and commercial hubs, and other related structures.   

Indeed, the dilemma of the office segment, the weakest link of the commercial real estate sector (CRE), should spread to other areas. 

Aside from the misallocation of capital, financing these imbalances through debt signifies a double whammy or the acceleration of capital consumption. 

The point having been made, these clusters of entrepreneurial errors are products of the distortion of money via the BSP's easy money regime. 

II. A Brief Insight into the Differences Between Pandemic-Recession Real Estate Deflation and Today’s Economic Landscape

Here’s a deeper dive into this developing seismic event.

The first article noted: "This was also the first time the RREPI posted a decline since the 9.4% drop recorded in the second quarter of 2021."

Figure 1

The last time deflation plagued the BSP’s Real Estate Price Index was in Q3 2020 (-0.4%), Q1 2021 (-4.2%), and Q2 2021 (-9.4%).  (Figure 1, upper window)

However, the difference between then and now is that policymakers responded to the pandemic-induced economic shutdown that led to five consecutive quarters of GDP contraction—a full-blown recession with aggressive measures.

Authorities reacted to this unprecedented disruption with a record fiscal deficit. Simultaneously, the BSP flooded the banking system with a historic Php 2.3 trillion of liquidity, aggressively cut interest rates to historic lows (2% from November 2020 to April 2022), significantly reduced the banking system’s Reserve Requirement Ratio (RRR) from 14% to 12%, implemented unprecedented capital, operational, and regulatory relief measures and subsidies, and placed a cap on the US dollar-Philippine peso exchange rate. The Finance Chief even ordered the SSS and GSIS to buy stocks and support the PSEi 30. 

All these collective actions were taken to prevent credit deflation and support collateral values—which back bank-issued loans—by reflating the bank-dominated financial system.

Fast forward to today, there has been no recession yet. Despite elevated interest rates, bank credit flows have been oozing.

III. Despite Declines in New Housing Loans, Total Real Estate Consumer and Supply-Side Loans Surge, Unaffected by High Cap Rates

Still, the RREPI fell into deflationary territory, led by properties in Metro Manila, which posted a 14.6% contraction—the second-largest decline since the 18.3% shrinkage in Q2 2021. (Figure 1, lower chart)

Areas outside the National Capital Region (AONCR) have experienced a sharp slowdown but remain on a growth path. 

Importantly, AONCR was barely affected by deflation during the pandemic era. Given the recent dynamics, it might not be exempt this time.

Figure 2

The BSP tacitly attributed this turn of events to the shrinking demand for new housing loans. (Figure 2, topmost table)  

In Q3 2024, the number of residential real estate loans (RRELs) granted for all types of new housing units in the Philippines contracted by 15.7 percent y-o-y. Specifically, loans granted in the NCR and AONCR decreased by 20.3 percent and 13.0 percent, respectively. Notably, the double-digit y-o-y contraction in RRELs in the Philippines, NCR, and AONCR in Q3 2024 was significant, yet not as severe as the decline in housing loan availment observed during the pandemic, which began in Q2 2020. (BSP, 2025) [bold added] 

However, a mere lack of demand for new loans is insufficient to cause a contraction. 

Nevertheless, theoretically, since real estate prices are duration-sensitive and influenced by changes in long-term interest rates, these shifts also impact capitalization rates (cap rates), which in turn affect property values.

Rising interest rates typically lead to higher cap rates, as investors demand a higher return to compensate for the increased cost of borrowing and the higher risk associated with interest rate changes. 

Consequently, higher cap rates generally lead to lower property values, as expected returns must adjust to match the new rates. Therefore, the adverse impact of higher cap rates on property values translates to diminished demand from investors. 

Notwithstanding the contraction in new property consumer loans, aggregate real estate consumer loans hit a record high of Php 1.061 trillion in Q3, although its growth rate fell from 13.5% in Q2 2024 to 8.07%. (Figure 2, middle graph) 

On the supply side, real estate bank loans reached a record Php 2.686 trillion in Q3 2024, with quarterly YoY growth accelerating from 3.86% in Q2 2023 to 13.9% in Q3 2024. 

In aggregate, total bank loans (net of interbank lending) rose to a record Php 13.24 trillion, with quarterly YoY growth also accelerating over the past five quarters. 

Thus, higher cap rates were hardly a factor; instead, the vibrant growth in supply-side bank lending likely contributed to more "build-and-they-will-come" supply. 

IV. Real Estate’s Falling GDP Contribution and Increased Bank Lending Share Point to Heightened Concentration Risks 

Furthermore, reports like this can be misleading: "Banks’ real estate exposure ratio dropped to 19.55% at end-September from 19.92% at end-June and from 20.55% at the end of September 2023—the lowest real estate exposure ratio recorded in five years, or since the 19.5% level as of September 2019." 

This is because the data on Real Estate Loans (REL) as a share of the Total Loan Portfolio (TLP) can signify many things. In this instance, the decline in REL/TLP is not primarily due to banks lending less to the sector or becoming more judicious or cautious. Rather, banks have been lending more aggressively to other sectors, particularly consumer credit cards and salary loans. 

In the realm of consumer loans, the share of real estate loans fell from a record high of 45.06% in Q4 2021 to 36.4% in Q3 2024, despite record peso real estate consumer loans. The 8.6% gap was filled by credit cards, which increased their share from 22.3% in Q4 2021 to 29% in Q3 2024. (Figure 2, lowest diagram) 

Meanwhile, the share of salary loans jumped from 8.3% to 13.22% over the same time frame. 

In statistics, there are many ways to "skin a cat." 

Unless funds are designated through escrow accounts, banks have virtually no control over how loan proceeds are spent. Some of the credit card and salary loans—or even loans declared for production purposes—could have been diverted to real estate mortgage payments, property purchases, or even stock investments. 

The fact that real estate credit growth remains buoyant suggests that most of the borrowed money may have been used for refinancing, with modest amounts allocated to acquiring second-hand properties (for consumer loans) and for property development expansion (supply-side loans). 

This also tells us that while new buyers played a smaller role in borrowings, more experienced buyers and property developers significantly contributed to the sector’s bank borrowings. 

On this note, despite lackluster growth, the real estate sector’s relative strength—compared to the overall weaker performance of other sectors—prompted a surge in its share of GDP in Q3 2024. 

The value-added contribution of the sector, which posted a 5.4% real GDP growth, amounted to 5.9% of national GDP. 

In the meantime, the real estate sector’s share of Universal-Commercial bank portfolios amounted to 20.46% in Q3.

Figure 3

Thus, a sector contributing 5.9% of GDP holds a 20.5% share of UC bank portfolios—representing significant concentration risks. (Figure 3, topmost chart)

Notably, this is based on the official definition of the banks’ real estate portfolios, whose actual exposure may already be understated. 

V. Q3 2024 Real Estate Deflation Means Lower Sectoral and National GDP; Slower Retail Sales Amidst Greater Supply Side Expansion Translates to More Vacancies

Of course, we’d also argue that the price deflation in Q3’s RREPI, which indicates slower spending across the industry, means less than the advertised GDP. Again, the sector reported 8.8% nominal GDP and 5.4% real GDP. (Figure 3, middle image) 

A lower real estate GDP should shave off a few more percentage points from Q3’s GDP of 5.2%. 

But here’s another potential discrepancy: According to the BSP, buyers of new properties have been less influential in driving demand for real estate. 

In particular, condominium prices plummeted by 9.4% in Q3 2024—the third largest of the five quarterly contractions from 2020 to the present. 

However, as a proxy, the performance of the top five listed developers (SM Prime, Ayala Land, Megaworld, Robinsons Land, and Vista Land) tells a different story. Their Q3 2024 real estate sales surged by 19.76% YoY, suggesting no signs of retrenchment in new property sales. 

This raises a critical question: Were the BSP numbers inaccurate, or have property developers been overstating their real estate sales? (Figure 3 lowest graph) 

As a side note, the property sales of the top five developers are not limited to residential condos; however, the comparison provided is for estimation purposes only.

Figure 4

But there’s more. 

The slowing rental income growth of the top four developers (SM Prime, Megaworld, Robinsons Land, and Vista Land) appears to align with the moderating revenue growth of the top six non-construction retail chains (SM Retail, Puregold, Robinsons Retail, Metro Retail, SSI Group, and Philippine Seven).  (Figure 4, topmost diagram)

In Q3, rental income for developers increased by 7.12%, while retail chains saw 6% growth. Both figures peaked in 2022 (Q2 and Q3, respectively) and have been on a downtrend since. 

This slowdown also reflects the growing mismatch between sales growth rates and the expansion of selling areas for retail chains and shopping malls, which has resulted in increasing vacancies. 

VI. Real Estate Deflation Amidst Near Full-Employment? What Happens When Unemployment Soars?

Intriguingly, despite unprecedented consumer bank borrowing rates and levels, the data signals intensifying signs of strained consumers—despite the supposedly near-full employment rate. (Figure 4, middle window) 

This also suggests that either the government’s labor data has been significantly stretched, or that consumers are increasingly burdened by the sustained loss of purchasing power in their wages and incomes, or by escalating balance sheet leverage. 

Worst of all, it could be both. 

What happens when the employment rate falls? 

Even more important, what happens when consumer credit slows or even retreats?

VII. Property Sector Woes: From Price Deflation to Income Losses and Increased Debt Loads 

Of course, deflation in the industry translates to weakened demand.

While property firms may attempt to mask this through possible overstatements of sales, internal pressures—such as diminishing liquidity, rising debt burdens, and increasing servicing costs—are likely to result in the eventual emergence of losses. 

When deflation gripped the industry in 2020–2021, the top five developers recorded net income losses over four quarters.(Figure 4, lowest chart) 

Currently, while net incomes are at all-time highs, their growth rate has been eroding.

Figure 5

Furthermore, debt levels continue to climb to record highs, accompanied by rising interest rate expenses. On the other hand, cash reserves have recently dropped and stagnated. (Figure 5, topmost and middle graphs) 

Coming down the pike, the likelihood of income deficits combined with a drain in business liquidity may result in even greater reliance on debt financing to sustain operations—even as collateral values deteriorate. 

If these developments have already impacted the top five developers, what more for marginal industry players—the mom-and-pop operators? 

VIII. Property Sector Woes: From Liquidity Strains to Soaring Bank NPLs?

Considering that banks hold significant exposure to real estate, the next phase will likely result in a surge in non-performing loans (NPLs). 

When deflation engulfed the sector in 2020-2021, real estate consumer NPLs surged and continued to rise even when the RREPI index peaked at 14.1% in Q2 2023. (Figure 5, lowest chart) 

NPLs hit a record Php 21.7 billion in Q2 2024 but slightly declined to Php 21.28 billion in Q3 2024. 

Due to credit expansion outpacing NPL growth, these numbers have been obscured as a function of ratios. They will likely become more prominent once credit expansion materially slows. 

Or what is likely to follow, after mounting losses and the depletion of liquidity, is a rise in NPLs—starting with smaller players and gradually affecting larger industry participants, in a "periphery-to-core" dynamic. 

IX. Will the BSP Launch QE 2.0 Soon?

In addition to surging public debt, the RREPI Q3 2024 deflation provides context for the BSP’s recent actions, which mirror a shadow of the pandemic recession playbook. These include the reduction of the Reserve Requirement Ratio (RRR) from 9.5% to 7%, effective October 2024, and the ongoing easing cycle, marked by the second and third interest rate cuts in the ONRRP in Q4 2024.

Furthermore, it explains the record-high 11-month public expenditures, reflecting the "Marcos-nomics" fiscal stimulus aimed at offsetting the decline in private sector demand.

Figure 6 

These policies have combined to momentarily bolster liquidity, which had been eroding from 2021 to 2023, as reflected in the YoY changes in M1. (Figure 6, topmost visual) 

Lastly, the Php 2.3 trillion injections by the BSP were partly channeled through its net claims on the central government (NCoCG). 

Interestingly, despite the supposed economic normalization, the BSP’s NCoCG remains elevated, prompting the IMF to request that the BSP become more transparent about its "balance sheet strategy." 

For instance, notes Inquirer.net, "the IMF said the BSP may want to publish more information about the size of its portfolio of government securities (GS), which remains 'substantial' despite declining since the central bank’s large purchases of state bonds during the COVID-19 pandemic." 

The BSP’s NCoCG stood at Php 650 billion as of November 2024, which is vastly above its 2002-2019 monthly average of Php 32.7 billion. (Figure 6, middle chart)

The BSP also holds Php 1.178 trillion worth of domestic securities (as of September 2024), accounting for 14.6% of its total portfolio. (Figure 6, lowest graph) 

The essence here is that by partly maintaining its quantitative easing (QE), the BSP remains heavily involved in controlling liquidity conditions in the banking system, where the real estate industry represents a significant counterparty.

This signifies the 'ratchet effect theory' in action, where temporary solutions to address specific problems become a permanent part of the legal landscape. (Matulef, 2023)

The Php 64 trillion question is: should current developments in the real estate sector deteriorate, would the BSP launch QE 2.0?

X. Conclusion: Two Ways to Bankruptcy: Gradually, then Suddenly

All told, despite the profusion of liquidity and the embrace of easy money policies, deflation in the Philippine real estate industry has emerged and could worsen.

This highlights the widening mismatch between vigorous debt-financed supply-side growth and weakening consumer demand—primarily driven by the erosion of the peso's purchasing power and the extended balance sheet leverage resulting from trickle-down policies, including the crowding-out effect. 

Although the challenge for policymakers would be to allow market forces to take command—cleansing household, corporate, and government balance sheets while rebuilding savings through productive undertakings—this would translate to a vastly diminished GDP and, more importantly, reduced political boondoggles. As such, this route is unlikely to occur. 

Nonetheless, authorities are likely to "fight the last war" by pursuing path-dependent, free-money policies aimed at boosting aggregate demand and GDP, while ignoring all other factors. 

Lastly, because the consensus believes these trends represent a temporary phenomenon, isolated from the pandemic's events and previous easy money policies, the "build-and-they-will-come" mentality is likely to prevail, driving an even greater debt-financed "race-to-build supply"—thereby exacerbating existing imbalances. 

As American novelist Ernest Hemingway wrote in The Sun Also Rises:

"How did you go bankrupt? Two ways. Gradually, then suddenly."

___

References: 

Prudent Investor, Philippine Real Estate:Mainstream Expert Worried Over Increasing Demand-Supply Gap; Q1 2023 Data ofTop 5 Listed RE Firms and the Property Index, May 28, 2023  

Bangko Sentral ng Pilipinas, Residential Real Estate Prices Decline in Q3 2024, December 27, 2024, bsp.gov.ph  

Michael Matulef, Beyond Crisis: The Ratchet Effect and the Erosion of Liberty August 18, 2023, Mises.org  

Ernest Hemingway, The Sun also Rises Chapter 13, 1926 Project Gutenberg Canada

October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends

 

The essence of public debt, as a financing institution, is that it allows the objective cost of currently financed expenditure projects to be postponed in time. For the taxpayer, public debt delays the necessity of transferring command over resource services to the treasury. —James M. Buchanan, “Confessions of a Burden Monger” 

In this issue

October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends

I. Preamble: The Perils of a Credit-Financed Economy

II. Analyzing Fiscal Policy: A Critical Perspective of the Record Php 16.02 Trillion Public Debt

III. Why Public Debt Will Continue to Rise: The Continuing Burden of the Military and Uniformed Personnel Pension (MUP) System 

IV. Pre-Election Labor Data? Declining Labor Participation Boosts Employment, While Agriculture Jobs Rise Despite Typhoons

V. Debt-Driven Consumption: The Risks of Unsustainable Household Borrowing

VI. Near Full Employment and Record Leverage, Yet a Tepid CPI Bounce in October: What Happened to Demand? 

VII. Philippine Public Debt Hits Record Highs in October 2024: Rising FX and Fiscal Risks Ahead!

October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends 

Philippine public debt hit a record Php 16.02 trillion last October. Here are the reasons why it is likely to maintain its upward trajectory.

I. Preamble: The Perils of a Credit-Financed Economy

This week’s outlook builds on last week’s exposition, "Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of 'Upper Middle-Income' Status."

But here’s a brief preamble that encompasses our economic analysis over time—dedicated to our new readers. 

1 Spending reflects the ideology underpinning the Philippine approach to economic development. 

2 This Keynesian-based framework has been built on a "top-down" or "trickle-down" model, relying on the elites and the government to drive growth. 

3 Consequently, the nation's political and economic structures have been significantly shaped by this approach.

Figure 1

For instance, the elite owned universal-commercial banks have restructured their operations to prioritize consumer lending over industrial loans. Banks have also controlled 83.3% of the Total Financial Resources (TFR) as of September (or Q3). (Figure 1, top and middle charts) 

4 A key outcome of this credit-driven spending is the historic savings and investment gap (SIG), manifested by the "twin deficits." These deficits reached unprecedented levels during the pandemic recession in 2020–2021, as the National Government and the Bangko Sentral ng Pilipinas (BSP) stepped in to rescue the banking system and protect elite interests. (Figure 1, bottom window) 

5 Credit-financed private sector investments have also included speculative activities based on a "build it, and they will come" or "race-to-build supply" dogma.  These activities span sectors such as real estate, infrastructure, construction, retail, and accommodations. 

6 Since these deficits require substantial funding—and with the government, non-financial corporations (including PSEi-listed firms), and even banks now acting as net borrowers—households and external savings have become critical sources for bridging this economic gap. 

7. In addition to the erosion of the peso's purchasing power, the depletion of savings is clearly reflected in the scale of financing requirements. 

Figure 2 

Even by mainstream measures, the nation’s gross savings rate has been on a downward trend since 2009, despite a brief two-year recovery in 2022 and 2023, from the lows of 2021. (Figure 2, topmost graph) 

8. Trends in motion tend to stay in motion—until a crisis emerges. 

Thus, it comes as no surprise that the serial expansion of systemic leverage—encompassing public debt and bank credit growth—has become the cornerstone of the "top-down" spending-driven GDP architecture. 

II. Analyzing Fiscal Policy: A Critical Perspective of the Record Php 16.02 Trillion Public Debt

Bureau of Treasury, December 3:  The NG's total outstanding debt stood at P16.02 trillion as of end-October 2024, reflecting a 0.8% or P126.95 billion increase from the end-September 2024 level. The increase was primarily driven by the valuation impact of peso depreciation against the US dollar from 56.017 at end-September 2024 to 58.198 at end-October 2024. Of the total debt stock, 67.98% is composed of domestic securities, while 32.02% consists of external obligations. (bold added) 

Bureau of Treasury, October 1: The National Government’s (NG) total outstanding debt stood at P15.55 trillion as of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from the end July 2024 level. This decline was primarily attributed to the revaluation effect of peso appreciation and the net repayment of external debt (bold added) 

“Look,” the establishment analyst might argue, “strong revenues have led to a declining fiscal deficit, and consequently, increases in debt have also decreased.” (Figure 2, middle diagram) 

We counter, "Yes, but that view is backward-looking." As economist Daniel Lacalle observed, "Deficits are always a spending problem because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increases every year."

That is to say, analyzing public balance sheets is more about theory than statistical analysis.

First, despite the hype surrounding the supposed ‘multipliers’ of deficit spending, diminishing returns are a natural outcome of political policies and are therefore unsustainable. 

Why has Japan endured an era known as the "lost decades" if this prescription worked? And if public spending is so successful, pushing this reasoning with reductio ad absurdum logic, why not commit 100% of resources or embrace full socialization of the economy?

Second, as long as public spending rises—which is mandated by Congress—economic slowdowns or recessions magnify the risks of a fiscal blowout. The pandemic recession exemplifies this. (Figure 2, bottom image) 

Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending. 

Third, cui bono? Are the primary beneficiaries of spending not the political elites, bureaucrats, and the politically connected private sector? Without a profit-loss metric, there is no way to determine whether these projects hold positive economic value. 

For instance, government fees from infrastructure projects do not reflect market realities but are often subsidized to gain public approval. 

How much economic value is added, or what benefit does a newly erected bridge in a remote province or city provide relative to its costs?

Fourth, in a world of scarcity, government activities not only compete with the private sector but also come at its expense—resulting in the crowding-out effects. 

Since the government does not generate wealth on its own but relies on extraction from the productive sectors, how can an increase in government spending not reduce savings and, therefore, investments?

Figure 3

Have experts been blind to the fact that these "fiscal stabilizers" or present-day "Marcos-nomics" stimulus have been accompanied by declining GDP? (Figure 3, topmost chart)

Lastly, who ultimately pays for activities based on "concentrated benefits and dispersed costs," or political transfers through the Logic of Collective Action?

Wouldn’t that burden fall on present day savers and currency holders or the peso (through financial repression—inflation tax) as well as future generations?

III. Why Public Debt Will Continue to Rise: The Continuing Burden of the Military and Uniformed Personnel Pension (MUP) System

A segment of the government’s October jobs report offers valuable insights into the trajectory of public spending. 

The basic pay for personnel in the Philippine military or Armed Forces is higher than, or on par with, the salaries of top-tier positions in the private sector. (Figure 3, middle graph) 

This is remarkable. 

The data reflects the political priorities of the government. 

After the overthrow of the Marcos 1.0 regime, the civilian government sought to pacify a restive military bureaucracy by granting pay increases and other benefits or perquisites. 

The previous administration implemented across-the-board pay raises to maintain favor with the military.

These actions have contributed to significant excesses in the unfunded Military and Uniformed Personnel (MUP) pension system, which now poses an increasing risk of "fiscal collapse. The system’s unfunded pension liabilities are estimated at Php 9.6 trillion, equivalent to 53% of the Philippines’ gross domestic product (GDP).

Yet, even after the Department of Finance (DoF) proposed reforms in 2023 to address these issues, the reform bill remains pending in Congress and could remain unresolved due to internal dissent.

It goes without saying that the recent pay increases affirm a subtle transition to a war economy, which will be publicly justified in the name of "defense" or under the guise of "nationalism." 

Yet, by setting pay scales higher than those in the private sector, the government have been prioritizing political appeasement over fostering the productive economy. This misalignment could lead to further erosion of the private sector. 

Consequently, this egregious pay disparity may incentivize individuals to seek government employment over private-sector jobs, potentially crowding out labor from the productive economy. 

These developments contradict the government’s stated goal of positioning the Philippines as a global investment hub. 

Perhaps partly due to MUP operating under unprogrammed funding, public debt increases have risen disproportionately above public expenditures. (Figure 3, lowest image) 

Needless to say, due to the protection of entrenched interest groups, public debt will continue to rise. 

IV. Pre-Election Labor Data? Declining Labor Participation Boosts Employment, While Agriculture Jobs Rise Despite Typhoons 

As an aside, authorities reported a slight increase in the unemployment rate, rising from 3.7% in September to 3.9% in October. Conversely, the employment rate declined slightly from 9.63% to 9.61%. Both figures remain close to the milestone rates of 3.1% and 9.69%, respectively, achieved in December 2023.

Figure 4

The increase in the employment rate, however, was driven by a drop in labor force participation. (Figure 4, upper visual)

Despite the population aged 15 and above increasing by 421,000 month-on-month (MoM) in October, the number of employed individuals decreased by 1,715,000, while the labor force shrank by 1,643,000. 

The Philippine Statistics Authority (PSA) explains that the non-labor force population includes "persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability." 

This highlights how arbitrary qualifications can inflate the employed population figures. 

Interestingly, among the three major employment sectors, only agriculture recorded a MoM increase (+282,000). Industry (-48,000) and services (-1,950,000) both experienced significant declines. Of the 21 employment subcategories, only seven posted expansions, led by agriculture (+323,000), construction (+234,000), and accommodation (+163,000). (Figure 4, lower chart) 

Notably, government and defense jobs saw a sharp drop of 358,000. 

The near all-time highs in labor data appear to be strategically timed for the upcoming elections. 

V. Debt-Driven Consumption: The Risks of Unsustainable Household Borrowing

Figure 5

On a related note, the BSP reported all-time highs in universal and commercial (UC) consumer lending last October, driven by credit card, auto, and salary loans in nominal or peso amounts. (Figure 5, topmost window) 

Household borrowings surged with 23.6% year-on-year (YoY) growth, fueled by increases of 27.8%, 18.34%, and 18.5%, respectively. (Figure 5, middle graph) 

This blazing growth rate has pushed the share of these loans in the bank’s portfolio to unprecedented heights. 

This dynamic indicates that "banked" households have been steadily increasing their leverage to support consumption and, possibly, to refinance existing debt. 

However, as the PSEi30’s Q3 data reveals, despite high employment rates and the rapid rise in household leverage, consumer spending remained sluggish. 

This suggests three possibilities: wage growth has been insufficient to keep up with current price levels, households are increasingly reliant on debt to bridge the gap and maintain their lifestyles, or it is a combination of both factors. 

Additionally, despite the BSP implementing a second rate cut, UC total bank lending growth showed early signs of slowing, decelerating from 11.32% in September to 10.7% in October. 

Do these trends imply a productivity-driven or credit-driven economy? 

At the current pace of unsustainable household balance sheet leveraging, what risks loom for consumers, the banking system, and the broader economy? 

VI. Near Full Employment and Record Leverage, Yet a Tepid CPI Bounce in October: What Happened to Demand? 

Still, despite near full employment, increases in household and production loans have failed to boost liquidity, savings, and inflation. 

October M3 growth remained stagnant at 5.5% from a month ago.

Also, the October CPI rose marginally from 2.3% to 2.5%, while core inflation increased from 2.4% to 2.5% over the same period. (Figure 5, lowest chart)

Additionally, could the CPI be nearing its bottom?

Might this signal the onset of the third wave in the inflation cycle that began in 2015?

Will a fiscal blowout fuel it?

Figure 6

Ironically, what happened to the correlation between systemic leveraging and the CPI? While systemic leveraging has been rising since Q3 2024, the CPI has failed to recover since peaking in Q1 2023. (Figure 6, topmost pane) 

Or, what happened to the record consumer leveraging, rising production debt, and near all-time highs in government spending? Why has demand slowed in the face of milestone-high systemic leveraging (public spending + bank credit expansion)?

Have the balance sheets of the private sector become a barrier to 'spending-based GDP'?

Intriguingly, while the government attributes the rise in the October CPI to typhoons (Typhoon Kristine and Typhoon Leon), which have caused price increases due to supply-side disruptions in food, jobs data indicate that such natural calamities have actually bolstered agricultural employment.

This possibly suggests a belief in the "broken window fallacy"—the misconception that growth can be driven by disasters or war!

These are incredible contradictions!

VII. Philippine Public Debt Hits Record Highs in October 2024: Rising FX and Fiscal Risks Ahead!

Circling back to the unparalleled Php 16.02 trillion debt, which—according to the BTr report—has risen due to the decline of the peso.

In contrast, when public debt declined last August, the improvement was also attributed to the strengthening of the Philippine peso.

While changes in the USDPHP exchange rate influence the nominal amount of public debt, the government continues to borrow heavily from both local and international capital markets. For instance, in Q3, the BSP approved state borrowings amounting to USD 3.81 billion. (Figure 6, middle image)

Following the surge in Q1 2023, foreign exchange (FX) borrowings by the public sector have continued to climb.

Moreover, since reaching a low of 28.12% in March 2021, the share of FX borrowings has been on an upward trend, with October’s share of 32.02% approaching May 2020's level of 32.13%. (Figure 6, lowest diagram)

This trend also applies to foreign debt servicing, as demonstrated last week, where FX-denominated servicing for the first ten months increased from 18.08% in 2023 to 21.9% in 2024.

Figure 7

In the face of fiscal stabilizers (deficit spending), the external debt of the Philippines continues to reach record highs in Q2, primarily due to state borrowings, which accounted for 57% of the total. Borrowing by banks and non-banks has also been on the rise. (Figure 7, topmost visual)

Debt levels in Q3 are likely to hit a new milestone given the approval of state FX loans by the BSP. 

Inadequate organic FX resources—reflected in revenues and holdings—have led to "synthetic dollar shorts," as highlighted last November. 

Meanwhile, the BSP appears to be rebuilding its FX reserves to restore the 85-88% range, which likely represents its USD anchor (de facto US dollar standard) for stabilizing the USDPHP exchange rate and domestic monetary operations. (Figure 7, middle image)

As of August, the BSP’s international reserves remain below this anchor level, as well as below its domestic security holdings. These holdings were used to inject a record Php 2.3 trillion to stabilize the banking system in 2020-2021.

While the liquidity injected remains in the system, it seems insufficient, as a 'black hole' in the banking sector appears to be absorbing these funds.

Compounding the issue, the lack of domestic savings to finance the widening savings-investment gap (SIG)—manifested through the "twin deficits"—necessitates more borrowing, both domestic and FX-denominated.

This deepening reliance on spending driven by the savings-investment gap increases the risk of a fiscal deficit blowout, accelerating the pace of debt accumulation 

Because the establishment peddles the notion that links public debt conditions to the USDPHP exchange rate, the BSP has recently been intensively intervening to bring the exchange rate below the 59 level.

These interventions are evident in the 5.6% year-on-year drop in November’s gross international reserves (GIR), which fell to USD 108.47 billion—well below the Q2 external debt figure of USD 130.18 billion. (Figure 7, lowest graph)

Yet, the wider this SIG gap becomes, the greater the pressure on the government, the BSP, and the economy to borrow further to meet FX requirements.