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.

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

 

Deficits are always a spending problem, because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increased every year—Daniel Lacalle

In this issue

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect?

V. Record 10-Month Expenditure: The Push for "Big Government"

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

VII. Rising Foreign Denominated Debt Payments!

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

IX. Q3 2024: Public Debt to GDP rises to 61.3%

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status 

Improvements in the 10-month fiscal balance have fueled the Philippine government’s unrealistic fixation on achieving 'Upper Middle Income' status—here's why. 

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints 

Inquirer.net, November 28: A double-digit revenue growth helped swing the government’s budget position back to a surplus in October, keeping the 10-month fiscal deficit below the 2024 ceiling set by the Marcos administration. The government ran a budget surplus of P6.3 billion in October, a reversal from the P34.4- billion deficit recorded a year ago, figures from the latest cash operations report of the Bureau of the Treasury (BTr) showed. 

Most media outlets barely mention that recent changes in tax collection schedules have distorted the Bureau of the Treasury’s reporting data. 

As noted in September, these adjustments significantly impact the perception of fiscal performance. 

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. 

Therefore, we should anticipate either a surplus or a narrower deficit this October. (Prudent Investor, October 2024)

Figure 1 

For instance, October’s surplus of Php 6.34 billion underscores how the quarterly revenue cycle boosts collections at the start of every quarter, often leading to either a surplus or a narrowed deficit. Surpluses were observed in January, April, and October this year. (Figure 1, topmost chart) 

However, as the government pushes to meet its year-end 'budget execution' targets in December, a significant spike in the year-end deficit could emerge from the remaining spending balance. 

Based on the budget allocation for 2024 amounting to Php 5.768 trillion, the unspent difference from the ten-month spending of Php 4.73 trillion is Php 1.038 trillion. 

Notably, in contrast to previous years, 2024 has already experienced three months of public spending exceeding Php 500 billion, with December still underway. (Figure 1, middle image) 

On the other hand, this could indicate a potential frontloading of funds to meet year-end targets. 

While spending excesses are constrained by law, the government has consistently exceeded enacted budget allocations since 2019. (Figure 1, lowest diagram) 

Consequently, this trend, shaped by political path dependency, suggests that the remaining Php 1.038 trillion could likely be surpassed. 

According to the Department of Budget and Management (DBM), budget adjustments are permissible under specific conditions: (DBM, 2012) 

1.    Enactment of new laws,

2.    Adjustments to macroeconomic parameters, and

3.    Changes in resource availability. 

These provisions may provide political rationales to justify increases in the allocated budget.

Figure 2

Expenditures, while down from last month, remain within their growth trajectory, while revenues have so far outperformed expectations. (Figure 2, topmost graph)

Despite October’s 22.6% revenue growth contributing to a lower ten-month deficit—down from Php 1.018 trillion in 2023 to Php 963.9 billion—it remains the fourth largest on record.

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

What is seldom mentioned by mainstream media is that such deficits serve as "fiscal or automatic stabilizers," ostensibly for contingent or emergency (recession) purposes.

While authorities repeatedly propagate their intent to elevate the economy to "upper middle-income" status and attain a credit "A" rating soon, they fail to disclose that current political-economic conditions are still functioning under or reflect continued reliance on a "stimulus" framework.

In fact, as we keep pointing out, the Bangko Sentral ng Pilipinas (BSP)’s reserve requirement ratio (RRR) and interest rate cuts represent monetary measures, while authorities have ramped up fiscal measures or "Marcos-nomics stimulus" for their political agenda—namely, pre-election spending and a subtle shift toward a war economy, alongside centralization through increased public spending and an enlarged bureaucracy or "Big Government."

Finally, while expenditures adhere to programmed allocations and revenues fluctuate based on economic and financial conditions as well as administrative efforts, they remain inherently volatile.

Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond.

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout.

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability.

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

Let us now examine the details.

In October, public revenue surged by 22.6%, driven primarily by a 16.94% growth in tax revenues, with the Bureau of Internal Revenue (BIR) contributing 16.19% and the Bureau of Customs (BOC) 11.5%. Meanwhile, non-tax revenues soared by 87.7%, largely due to revenues from other offices, including "privatization proceeds, fees and charges, and grants."

These activities boosted the 10-month revenue growth from 9.4% in 2023 to 16.8% this year, largely driven by a broad-based increase, largely powered by non-tax revenues.

It is worth noting that, despite reaching a record high in pesos, the BIR’s net income and profit growth significantly softened to 8.3%, the lowest since 2021, remaining consistent with the 9-month growth rate.  This segment accounted for 50% of the BIR’s total intake. (Figure 2, middle pane)

In contrast, sales taxes jumped by 30.6% over the first 10 months, marking the highest growth rate since at least 2017, and represents 30% of the BIR’s total revenues. Sales taxes vaulted by 31.6% in the first 9 months. (Figure 2, lowest chart)

The reason for focusing on the 9-month performance is to compare its growth rate with that of the PSEi 30, allowing for a closer understanding or providing a closer approximation of the BIR's topline performance.

Figure 3

Unfortunately, when using same-year data, the PSEi 30 reported a 9-month revenue growth of 8.1%, the slowest since 2021. This pattern is echoed in its net income growth of 6.8%, which is also the most sluggish rate since 2021. (Figure 3 upper window) 

To put this in perspective, as previously discussed, the 9-month aggregate revenues of the PSEi 30 represent approximately 27.9% of the nominal gross domestic product (NGDP) for the same period. 

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect? 

In its September disclosure, the Bureau of the Treasury cited changes in the VAT schedule as a key factor boosting tax collections: " The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return" (Bureau of Treasury, October 2024) [bold added] 

Once again, the adjustment in VAT schedules played a pivotal role in increasing revenues, helping to reduce the deficit and debt—a topic we discussed in September 2024 (Prudent Investor, September 2024). 

Or, whether by design or as an unintended consequence, a critical factor in the slower deficit has been a shift in government tax collection and accounting procedures. 

But what will happen if, under the same economic conditions or with only slight improvements, the effects of such transient changes wear off? Will the deficit soar again? 

Moreover, it is important to note that all this is occurring while bank credit expansion and public debt are at record highs. 

What will happen to credit and liquidity-fueled demand once household and corporate balance sheets become saturated with leverage? 

It’s also noteworthy that, even as the share of revenue to nominal GDP (NGDP) reached its highest level in Q2 and Q3 of 2024, real GDP continues its downward trend—a dynamic that has persisted since 2016 and reemerged in 2021. (Figure 3, below graph) 

Are these not symptoms of the "crowding-out effect," where the increasing share of government interventions, measured by expenditures, debt, and deficits, translates into diminished savings and capital available for private sector investments? 

V. Record 10-Month Expenditure: The Push for "Big Government" 

But what about expenditures? 

Local Government Unit (LGU) spending surged by 11.97%, and national disbursement growth reached 14.3%, powering an overall increase in October expenditures of 11.1%. Interest payments, on the other hand, fell by 6.1%. The former and the latter two accounted for shares of 18.1%, 66.64%, and 11.9% of the total, respectively.

For the first 10 months of the year, expenditures grew by 11.5%, reaching a record-high Php 4.73 trillion, driven by LGU spending, National disbursements, and interest payments, which posted growth rates of 9.1%, 11.9%, and 23.03%, respectively.

As noted above, these record expenditures are primarily focused on promoting political agendas: pre-elections, a subtle shift towards a war economy, and an emphasis on centralization through infrastructure, welfare, and bureaucratic outlays.

Figure 4

One notable item has played a considerable role: 10-month interest payments not only outperformed other components in terms of growth but also reached a record high in peso terms. (Figure 4, topmost graph) 

Additionally, their share of total expenditures rose to levels last seen in 2009. 

That said, the ratio of expenditures to NGDP remains at 23.98% in Q2 and Q3 and has stayed within the range of 22% to 26%—except for two occasions—since Q2 2020. (Figure 4, middle chart) 

Over the past 18 quarters, this ratio has averaged 23.4%. 

As mentioned above, despite all the hype about achieving "upper middle income" status and attaining a "Class A" credit rating, the Philippines continues to operate under a fiscal stimulus framework, which has only intensified with recent policies which I dubbed as "Marcos-nomics stimulus."

In the timeless words of the distinguished economist Milton Friedman, "Nothing is so permanent as a temporary government program."

Current conditions also validate the "Big Government" theory articulated by the economist Robert Higgs, particularly regarding what he termed "The Ratchet Effect." This concept refers to the "tendency of governments to respond to crises by implementing new policies, regulations, and laws that significantly enhance their powers. These measures are typically presented as temporary solutions to address specific problems. However, in history, these measures often outlast their intended purpose and become a permanent part of the legal landscape." (Matulef, 2023)

The push towards "Big Government" is evident, with approximately a quarter of the statistical economy deriving from direct government expenditures.

This figure does not include the indirect contributions from private sector participation in government activities, such as public-private partnerships (PPPs), suppliers, outsourcing and etc. 

As a caveat, the revenue and expenditure-to-NGDP ratio is derived from public revenue and spending data and nominal GDP—an aggregate measure where government spending is calculated differently—potentially leading to skewed interpretations of its relative size. 

In any case, as the government grows, so too does its demand for resources and finances—all at the expense of the private sector, particularly micro, small, and medium enterprises (MSMEs), as well as the purchasing power of the average Filipinos, represented here as Pedros and Marias. 

While government fiscal health may provide some insights into its size, there are numerous hidden or immeasurable costs associated with its expansion: compliance costs, public sector inefficiencies, regulatory and administrative burdens, policy uncertainty, moral hazard, opportunity costs, reduced incentives for innovation, deadweight losses, productivity costs, economic distortions, social and psychological costs, and more.

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

Rising interest payments represent some of the symptoms of "Big Government."

What’s remarkable is that, in just the first 10 months of 2024, the cost of servicing debt (amortization plus interest) soared to an all-time high of Php 1.86 trillion—16% higher than the previous annual record of Php 1.603 trillion set in 2023. And there are still two months to go! (Figure 4, lowest visual)

Amortization and interest payments exceeded their 2023 annual figures by 25.3% and 1.65%, respectively. 

Notably, amortization payments surged by a staggering 760% in October alone, reaching Php 161.5 billion.

As a result, amortization and interest payments have already surpassed their full-year 2023 totals. However, because the government categorizes amortizations (or principal payments) as financing rather than expenditures, they are not included in the budget.

VII. Rising Foreign Denominated Debt Payments!

There's more to consider.

Figure 5

Payments (amortization + interest) on foreign-denominated debt in the first 10 months of 2024 increased by 52%, reaching a record high. This brought their share of total payments to 21.9%, the highest since 2021. (Figure 5, topmost chart)

Unsurprisingly, the government borrowed USD 2.5 billion in the end of August, likely to refinance existing obligations. Adding to this, authorities reportedly secured another $500 million loan from the Asian Development Bank last week in the name of "climate financing."

Nonetheless, these serve as circumstantial evidence of increased borrowing to fund gaps, reflecting the "synthetic dollar short" position discussed last week.

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

Here’s where mainstream narratives often place emphasis: a slower deficit translates into slower growth in public debt. (Figure 5, middle graph)

In other words, a decrease in financing requirements or a reduction in the rate of increase in public debt decreases the debt/GDP ratio.

Authorities are scheduled to announce public debt data next week.

The apparent gaslighting of fiscal health suggests that authorities are employing tactical measures to improve macroeconomic indicators temporarily. These efforts seem aimed at buying time, likely in the hope that the economy will gain sufficient traction to mask structural weaknesses.

Still, while public debt continues to rise—albeit at a slower pace—bank financing of public debt through net claims on the central government (NCoCG), which began in 2015, appears to have temporarily plateaued. At the same time, the BSP's direct financing of the national government seems to have stalled. (Figure 5, lowest image)

However, none of these emergency measures have reverted to pre-pandemic levels.

The government shows no indication of weaning itself off the stimulus teats.

IX. Q3 2024: Public Debt to GDP rises to 61.3%

Unfortunately, the record savings-investment gap underscores a troubling reality: the GDP is increasingly propped up by debt.

While mainstream narratives highlight the prospect of a lower public debt-to-GDP ratio, they often fail to mention that public debt does not exist in isolation.

In the aftermath of the Asian Financial Crisis, the Philippine economy underwent a cleansing of its balance sheet, which had been marred by years of malinvestment. When the Great Financial Crisis struck in 2007-2008, the Philippine economy rebounded, aided by the national government’s automatic stabilizers and the BSP's easing measures.

However, during that period, the BSP mirrored the Federal Reserve's policy playbook, prompting the private sector to absorb much of the increased borrowing. This reduced the economy’s reliance on deficit-financed government spending and shifted the debt burden from the public to the private sector, enabling a decline in the public debt-to-GDP ratio.

Today, however, this is no longer the case.

Figure 6

Following the pandemic-induced recession, where bank credit expansion slowed, the government stepped in to take the reins, driving public debt-to-GDP to surge. As of Q3, it remained at 61.3%—the second highest level since 2021’s peak of 62.6% and the highest since 2004. 

Currently, despite high-interest rate levels, both public borrowing and universal commercial bank lending have been in full swing—resulting in a systemic leverage ratio (public debt plus universal commercial bank credit) reaching 108.5% of nominal GDP in 2023. 

This means that the government, large corporations, and many households with access to the banking system are increasingly buried in debt.  

In any case, debt is perceived by consensus as a "free lunch," so you hardly ever hear them talk about it. 

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

In conclusion, while current fiscal metrics may appear to show surface-level improvements, the government remains addicted to various free-lunch policies characterized by easy money stimulus. 

The government and elites will likely continue to push for a credit-driven savings-investment gap to propel GDP growth, leading to further increases in debt levels and necessitating constant liquidity infusions that heighten inflation risks. 

The establishment tend to overlook the crowding-out effects stemming from government spending (and centralization of the economy), which contribute to embedding of the "twin deficits" that require more foreign financing—ultimately resulting in a structurally weaker economy. 

The relentless pursuit of "upper middle income" status resembles a futile obsession—a "wet dream" driven more by the establishment’s obsession with benchmarks manifesting social signaling than substantive progress. 

For distributional reasons (among many others), the GDP growth narrative does not reflect the true state of the economy. 

Persistent self-rated poverty and hunger, widening inequality, elevated vacancies in the real estate sector, low savings rates, and stagnating productivity are clear indicators that GDP number benefits a select few at the expense of many. This, despite debt levels soaring to historic highs with no signs of slowing. 

Even the Philippine Statistics Authority’s (PSA) per capita consumer and headline GDP trendlines contradict the notion of an imminent economic or credit rating upgrade. 

While having the U.S. as a geopolitical ally could offer some support in the pursuit of cheaper credit through a potential credit upgrade, it is important to acknowledge that actions have consequences—meaning the era of political 'free lunches' are numbered. 

And do authorities genuinely believe they can attain an economic upgrade through mere technical adjustments of tax schedules and dubious accounting practices, akin to the "afternoon delight" and 5-minute "pre-closing pumps" at the PSEi 30? 

Yet because the political elites benefit from it, trends in motion tend to stay in motion, until… 

___

References 

Prudent Investor, September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso October 28, 2024 

Department of Budget and Management, THE BUDGETING PROCESS, March 2012, dbm.gov.ph

Bureau of Treasury, September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024, treasury.gov.ph

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024

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

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

 

Inflation was created by the wrong monetary policy, and incorrect central bank measures may have lasting negative impacts on the economy. The first effect is evident: governments continue to crowd out the real economy, and families and businesses suffer the entire burden of rate hikes. Maybe the objective was always to increase the size of the public sector at any cost and implement a gradual nationalization of the economy—Daniel Lacalle 

In this issue

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

I. Clarifying Our Analytics of the PSEi 30 Data

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

V. Analysis by PSEi 30 Member Firms (9-Month)

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression 

The PSEi 30’s lackluster fundamental performance validated the mainstream’s unexpected decline in Q3 GDP, highlighting the persistent effects of crowding out and financial repression. 

I. Clarifying Our Analytics of the PSEi 30 Data 

Two factors must be explained before delving into the 9-month and third-quarter analysis of the performance of PSEi 30 constituent firms. 

First, the definition of data is crucial.  

-Data from the same reporting coverage provides a more accurate comparison, as it reflects the PSEi members during the relevant period. This is referred to here as 1A data.

-Data from a different reporting coverage/period results in an apples-to-oranges comparison due to two factors: periodic updates to PSEi constituents and the exclusion of past data revisions. This is referred to as 1B data.

-Aggregates may be overstated, as they include not only holding companies but also their subsidiaries.

Q3 PSEi 30’s Financial Activities: Defining the Operating Conditions

Next, it is essential to define the operating conditions of the third quarter.

Figure 1

The Philippine Q3 2024 GDP unexpectedly slipped to 5.2%, its lowest level since Q2 2023’s 4.3%, despite systemic leverage hitting an all-time high.  (Figure 1, upper graph)

Public debt and bank credit expansion grew by 11.4%, marking its fastest pace since Q4 2022.

The Bangko Sentral ng Pilipinas (BSP) initiated its "easing cycle" with a 25-basis point rate cut in August, which helped fuel this growth.

Despite reaching the near all-time high employment rate, both headline and core inflation rates fell to 3.2% and 2.6%, respectively, the lowest since Q1 2022. (Figure 1, lower graph)

Figure 2

Marcos-nomics stimulus, channeled through its fiscal aspect, remained vibrant, with public spending growing by 6.4% in Q3, reaching its third-highest level. (Figure 2, upper image)

Once again, despite record leverage, money supply growth, measured by M3, stumbled to its lowest level since Q3 2022.

It was an active period for fiscal and liquidity operations by the banking system and the BSP. As a ratio to GDP, banks' net claims on the central government (NCoCG) reached the third-highest level on record, while the BSP's counterpart dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure 2, lower diagram)

In contrast to the establishment’s "restrictive" narrative, Q3 indicated loose financial conditions, which were further bolstered by the BSP’s rate cut and sustained increases in systemic leverage, supported by BSP and bank liquidity, as well as fiscal operations.

The notion that the BSP’s easing would provide support to the economy not only failed to materialize; consumption fell, as evidenced by the declining trend in the Consumer Price Index (CPI) and the money supply—ironically occurring despite strong liquidity injections.

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

These macroeconomic conditions were reflected in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):

Figure 3

One. The aggregate non-financial debt increased by Php 208 billion, marking the lowest increase since 2020. This figure excludes borrowings of the three largest banks (Figure 3, topmost table) 

Two. The cumulative net income growth of Php 47.17 billion was also the smallest since 2021. 

Three. Revenue expansion, totaling Php 395 billion, was the second lowest since 2021. 

Four. The PSEi 30’s cash reserves shrank by Php 5.27 billion for the second consecutive year, but at a more minimal scale compared to last year. 

These figures indicate that all segments exhibited a slowdown, with net income experiencing the most pronounced decline. 

There’s more. 

Because the non-financial debt-to-net income ratio in 2024 represented the second highest level since 2022, it indicates that corporations borrowed more to generate income (Php 4.4 debt for every peso of net income). (Figure 3, middle graph)

Additionally, they borrowed to address their liquidity shortfall.

However, this data understates the full picture, as it excludes the borrowings of the three largest banks. These banks reported an increase of Php 491 billion in bills payments alone!

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

Nota Bene: While we rely on the accuracy of these reports, it is worth noting the potential for discrepancies. Past instances, such as PLDT’s 4-year "budget overrun," demonstrate that reporting errors often go overlooked or ignored by both the PSE and government agencies.

Such regulatory lapses could create conditions that encourage misreporting, exemplifying the moral hazard syndrome.

We suspect that some companies may be understating the extent of their leverage by reclassifying it under other liability categories

Debt: In nominal terms, non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php 5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes bank debt. (Figure 3, lowest window)

Net Income: Published net income expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93 billion. However, this represented the lowest growth rate since 2021.

Revenues: Despite historic increases in systemic leverage, near full employment and the third-largest public spending on record, revenue grew by an unimpressive 9.4%, reaching a record Php 5.265 trillion.

This also translates to a PSEi 30 revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating that these elite firms contribute more than a quarter of the estimated Nominal GDP. If we include all 284 listed firms, this figure would likely account for approximately two-fifths of NGDP.

This manifests the trickle-down structure of the Philippine political economy, where the prevailing approach prioritizes consolidating wealth and power among politically connected entities through centralization, rather than fostering genuine "inclusiveness" via grassroots entrepreneurship (such as SMEs) or a bottom-up framework.

Lastly, the government reported a headline GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by only 6.8% suggesting a significant overstatement of the statistical economy. 

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

Figure 4

Although the holding firms sector posted the smallest percentage growth, it experienced the largest increase in debt, amounting to Php 104.21 billion, followed by the real estate sector with Php 38.62 billion. (Figure 4, upper table)

The financials and holding firm sectors recorded the highest net income growth, with increases of Php 20.327 billion and Php 13.35 billion, respectively, accounting for 43% and 28.3% of the total.

The sector with the highest revenue growth was the holding firm sector, which generated Php 196.653 billion, followed by financials with Php 86.44 billion, representing 49.8% and 22% of the total, respectively.

Meanwhile, the services sector led in cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial sector experienced the largest cash outflows.

In Q3, holding firms and financials reported the highest net incomes of Php 16.84 billion and Php 7.8 billion, respectively. (Figure 4, lower table)

These two sectors also delivered the strongest revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.

In summary, during the nine-month period and in Q3, the financials and holding sectors dominated net income and revenue growth, while other sectors struggled to keep pace.

V. Analysis by PSEi 30 Member Firms (9-Month)

Figure 5

Broken down into individual categorical activities:

The top firms contributing to non-financial debt increases were San Miguel Corporation (SMC) and Ayala Corporation with increases of Php 63.9 billion and Php 57.6 billion, respectively.

Out of the 27 firms analyzed, 15 posted debt expansion during the period, with SMC accounting for 30% of the total debt growth in pesos.

In the net income growth segment of the PSEi 30, International Container Terminal Services, Inc. (ICT) and the Bank of the Philippine Islands (BPI) were the top performers with Php 9.85 billion and Php 9.441 billion, correspondingly.

On the other hand, DMCI Holdings (DMC) posted the largest decline among the eight firms that reported a decrease in net income growth.

SMC and BPI also led the revenue growth segment. Conversely, DMC reported the largest revenue decrease among the seven firms that experienced revenue declines during the period. Notably, SMC accounted for 30% of total revenue growth in peso terms.

Finally, ICT emerged as the leader in cash reserves growth, while Aboitiz Equity Ventures (AEV) headed the minority of ten issues that saw reductions in cash flows.

Once again, even among the elite firms, only a select few tend to dominate in terms of performance.

Notably, financial giants such as BPI and BDO emerged as some of the most prominent gainers, while non-consumer sectors, including ICT and SMC, led in the net income and revenue segments, respectively.

Interestingly, the underwhelming performance of consumer-focused firms like SM Investments and Ayala Corporation—arguably the most exposed to the local consumer market—highlights the underlying fragility of the sector

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

The Bottom Line: Despite the "Marcos-nomics stimulus," near-record employment levels, and loose financial conditions, the conspicuous signs of weakness among the PSEi 30 member firms not only align with the GDP slowdown observed in Q3 but may also indicate much slower overall growth.

Moreover, this underbelly has exposed the firms’ increasing vulnerability to extensive leveraging.

What is particularly notable is that many of these PSEi 30 firms are linked to political projects that should have enhanced their performance.

Instead, their underwhelming performance could be indicative of the detrimental effects of the crowding-out syndrome—a phenomenon that gradually erodes economic productivity over time—compounded by financial repression and other forms of government interventions (such as the subtle shift to a war economy, increasing centralization and more).