Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

 

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side― John Wolfgang Goethe

 

In this issue

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle

Conclusion: Accommodation as Policy, Crisis as Outcome 

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle 

Inflation optics, soft-peg constraints, and the mounting cost of balance-sheet preservation.

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing 

Interest rate cuts have become the by-phrase of the local financial community. 

Authorities continue to signal sustained monetary loosening as economic stimulus, while establishment economists and legacy media have rationalized financial easing—and the resulting rally in the PSEi 30—as a necessary catalyst for market recovery. Ironically, the same narrative also attributes the peso’s record weakness to this easing cycle. 

Either the mainstream genuinely believes that peso depreciation and economic recovery naturally go hand in hand, or market relationships are being selectively blurred or fudged to justify coordinated equity-market pumps.

Recent BSP releases—including the Universal and Commercial (UC) Bank’s November Loans Outstanding, the November Depository Corporations Survey, the November Philippine Bank’s Balance Sheet and Selected Performance Indicators, and the December central bank survey (MAS) indicators—tell a more troubling story beneath the liquidity narrative. 

Since late 2024, the BSP has pursued an extended easing cycle combining aggressive reserve-requirement reductions and repeated policy rate cuts, alongside financial backstops such as the doubling of deposit insurance coverage. 

Reserve requirements for UC banks were slashed from 9.5% to 7.0% in late 2024, and further to 5.0% by March 2025, amounting to a 450-basis-point liquidity release. Over the same period, successive rate cuts brought the policy rate down to 4.5% by December 2025. 

This accommodative stance unfolded against the backdrop of lingering pandemic-era fiscal deficits, whose credibility was further strained by the flood-control corruption controversy that erupted in Q3 2025. 

Yet despite persistent easing signals, private credit growth failed to re-accelerate. 

Figure 1

Universal bank lending peaked in January 2025 and slowed again by November, with both production loans and consumer credit losing momentum. (Figure 1, topmost window) 

UC banks reported a marked deceleration in November 2025, with total loan growth at around 10.7%, the slowest pace since late 2024. This was driven by weakening production loan growth (about 9.0%), while consumer credit, though still elevated in nominal terms, cooled to roughly 23%, its slowest expansion since late 2023. (Figure 1, middle image) 

This slowdown is striking given the macro backdrop: post-4% Q3 GDP growth, moderating inflation, and near-full employment—conditions that should, in theory, have reinforced credit demand. 

Instead, while lending momentum faded, monetary liquidity continued to expand. M1 growth (cash in circulation and transferable deposits) remained positive at just over 7% in November, extending its uptrend even as credit creation slowed. (Figure 1, lowest graph)

Figure 2

At the same time, deposit liabilities grew by only about 7.3%, continuing to underperform loan growth and reinforcing the underlying imbalance. (Figure 2, topmost visual) 

Taken together—slowing production and consumer loans, lagging deposit growth, and rising transactional liquidity—the evidence suggests that monetary easing is no longer transmitting into productive credit formation. 

Rather than catalyzing real investment, it appears to be inflating balance sheets and leverage, heightening systemic fragility without delivering commensurate real-economy gains. 

That is not all. 

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth 

In the BSP’s December central bank survey, currency issuance not only surged to a record Php 3.2 trillion, but its year-on-year YoY growth accelerated to about 17–18%, surpassing the 2018 spike and ranking as the third-highest on record, behind only 2008 and 2020. (Figure 2 middle image) 

Notably, 2018 coincided with the BSP’s baptismal phase of its reserve-requirement (RRR) easing cycle, while 2008 (Great Financial Crisis) and 2020 (Pandemic recession) were both periods marked by domestic economic stress and volatility spikes of the USDPHP. 

History may not repeat—but does it rhyme? 

This liquidity surge, which should be further reflected in the December Depository Corporations Survey, likely contributed to the January-effect euphoria in the PSE, reinforcing asset (equity) price inflation even as credit growth slowed. 

Crucially, this marginal liquidity growth is not coming from private lending. 

Instead, net claims on the central government (NCoCG) held by banks surged to a record Php 5.89 trillion, up roughly 11% year-on-year, the fastest pace since mid-2024. 

At the same time, the BSP’s own NCoCG rebounded to around Php 760 billion—its highest nominal level since March 2025, largely due to a sharp decline in liabilities to the national government—despite falling nearly 20% YoY. (Figure 2, lowest chart) 

This decline most plausibly reflects a drawdown of government deposits at the BSP or reduced sterilization vis-à-vis the Treasury, mechanically releasing base money into the financial system. While debt repayment is a theoretical alternative, the persistence of record public debt levels as of November (Php 17.562 trillion) makes that explanation unlikely. 

Despite falling Treasury yields—which have reduced banks’ mark-to-market losses and should have eased balance-sheet pressures—banks continued to accumulate sovereign exposure.

Figure 3

Held-to-Maturity (HTM) securities climbed to a record Php 4.08 trillion in November, underscoring a significant reallocation into government paper. HTMs now account for roughly 70% of banks’ net claims on the central government. (Figure 3, topmost window) 

Banks have also escalated on investments. After a brief pullback in September from unprecedented highs, Available-for-Sale (AFS) securities rebounded by over 7% to Php 3.30 trillion, approaching HTM levels and reinforcing the portfolio shift away from private credit. (Figure 3, middle diagram) 

Yet despite record nominal credit, aggressive securities accumulation, and abundant liquidity, bank liquidity metrics continue to deteriorate. (Figure 3, lowest graph) 

• Liquid assets-to-deposits fell to about 47%, near pre-easing and pandemic-era lows, effectively erasing the BSP’s 2020-21 emergency liquidity buffers. 
• Cash-to-deposits dropped to roughly 9.7% in November, the second-lowest level on record.

Figure 4

While banks have reduced bills payable, bond payables continued to rise, lifting total borrowings to around Php 1.5 trillion, down from the Php 1.906 trillion March 2025 peak but still elevated. (Figure 4, topmost window) 

Liquidity management has increasingly shifted inward: interbank lending surged to a record Php 502 billion, alongside repo transactions exceeding Php 100 billion, signaling intensive liquidity recycling within the banking system. (Figure 4, middle image) 

Taken together, these figures point to a clear pattern. 

Banks are reallocating balance sheets toward sovereign absorption, liquidity management, and interbank cushioning—not expanding productive credit. The BSP, in turn, appears less to be steering outcomes than accommodating them, validating financial system preferences rather than redirecting capital toward growth. 

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle 

The BSP’s recent policy trajectory reveals a central bank anchored less to credit conditions or balance-sheet health than to inflation optics and system accommodation. 

Reserve-requirement cuts and successive policy-rate reductions have consistently followed periods of CPI deceleration, even amid deteriorating bank liquidity metrics, balance sheets increasingly tilted toward sovereign absorption, and liquidity being recycled within the financial system rather than funding productive expansion. (Figure 4, lowest chart) 

Monetary easing, in this context, has been CPI-conditioned rather than cycle-stabilizing. 

CPI, therefore, becomes highly politicized and susceptible to the policy agendas of political leadership. 

Why this persistence? 

While the BSP’s inflation-targeting framework does not explicitly target asset prices, it cannot ignore collateral values in a bank-dominated financial system. 

Falling collateral values threaten capital adequacy, impair credit transmission, and raise systemic stress. Policy calibration therefore prioritizes preventing balance-sheet rupture, even when that means sustaining distortions and postponing adjustment.

Figure 5

This implicit bias toward continuity has encouraged banks to manage imbalances rather than resolve them—through accounting optics, ratio management, and asset reclassification. 

Non-performing and related risks (e.g. loan loss provision) are contained not by deleveraging, but by supporting numerator growth (total loan portfolio—TLP—or bank credit growth) relative to denominators, a classic Wile E. Coyote velocity dynamic: balance sheets continue running forward, suspended by liquidity and policy accommodation, even as underlying fundamentals weaken. (Figure 5, top and middle panes) 

The same dynamic appears on the BSP’s external balance sheet. While net foreign assets (NFA) remain elevated, their support increasingly comes from valuation and financing effects rather than organic FX inflows. 

• Rising global gold prices mechanically lift reserve valuations without expanding usable foreign-exchange buffers. (Figure 5, lowest graph) 
• National government external borrowing routed through the BSP temporarily bolsters NFA, but these gains are liability-mirrored, not earned. 
• Bank borrowings similarly augment liquidity while obscuring underlying fragility.

Figure 6

More revealing than the level of NFA is its slowing rate of accumulation, which coincides with persistent USDPHP pressure. (Figure 6, topmost visual) 

This deceleration signals that the BSP’s capacity to manage the exchange rate is increasingly constrained by the very accommodations it sustains. 

Peso dynamics, therefore, are not incidental. Under the BSP’s soft-peg regime, exchange-rate management remains a direct but tacit policy objective, subordinated to liquidity preservation, fiscal dominance, and bailout imperatives. (Figure 6, lowest chart) 

Rather than defending a fixed level, the BSP has been compelled to tolerate managed depreciation, balancing currency weakness against the need to sustain domestic liquidity and support a political economy defined by a widening savings-investment gap. 

USDPHP hit a record 59.46 last week amid declining volume and suppressed volatility, highlighting trade constraints and the footprint of BSP intervention. 

This trade-off is most visible in energy and utility pricing—not through import dependence, but through bailout architecture. Producer subsidies, RPT reliefs, administered pricing, and government-nudged implicit M&A arrangements suppress inflation pass-through while deepening balance-sheet entanglement between the state, the financial system, and regulated corporates. 

CPI relief is achieved, but only by displacing risk elsewhere in the system. 

• In this sense, the regime exemplifies Goodhart’s Law: by targeting CPI, other signals—credit quality, liquidity resilience, capital discipline—are progressively distorted. 
• It also reflects a Heisenberg Uncertainty-style policy problem: intervention alters the system it seeks to stabilize, most visibly in leverage-dependent sectors and currency dynamics. 

Sustained FX intervention further amplifies this fragility, increasing the risk that adjustment, when it arrives, will be sharper and more volatile. 

Viewed together, the pattern is consistent. The BSP is not directing capital toward productive expansion nor pre-empting cyclical deterioration. It is validating outcomes shaped by asset inflation, fiscal dominance, bailout logic, and inflation optics, accommodating systemic constraints in ways that systematically favor incumbents. 

The public is offered stability in appearance, while adjustment is deferred—quietly, repeatedly, and at growing long-term cost. 

Conclusion: Accommodation as Policy, Crisis as Outcome 

The evidence presented does not describe policy error in the conventional sense. It reflects the unintended consequences of an institutional regime constraint operating within a political-economic framework that systematically privileges incumbent interests. 

The BSP and the bank-dominated financial system operate under conditions where inflation optics, fiscal dominance, bailout dependencies, and soft-peg maintenance sharply limit genuine counter-cyclical control. Within this structure, discretion is less about steering the cycle than accommodating existing balance-sheet vulnerabilities. 

What is sold as stimulus is largely balance-sheet preservation; what is promoted as stability is increasingly liquidity- and valuation-driven; and what appears as growth is often internal transactional recycling rather than productive expansion. 

In such a regime, monetary policy does not fail abruptly — it erodes gradually, until markets, balance sheets, or external constraints force destabilizing adjustments. 

The risk is not that the peso weakens, or that interest rates are “too low,” but that accumulated distortions increase the likelihood that eventual correction becomes more volatile, less controllable, and more socially costly. 

This is not an argument about intent or competence. It is an argument about incentives, institutional constraints, and the limits of accommodation once gravity reasserts itself. 

Where political-ideological rigidity suppresses reform, crisis ceases to be an accident and becomes the logical endgame.

 

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

 

The pretended solicitude for the nation’s welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money—Ludwig von Mises

In this issue:

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility

II. Strong US Dollar Narrative Debunked

III. BSP’s Easing Cycle, Data vs. Narrative

IV. Cui Bono? (Redux)

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables

VII. Averch–Johnson Trap and Public Choice Theory in Action

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets

IX. Bank Liquidity Strains Beneath the Surface

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

XI. Keynesian Malinvestment and Policy Distortions

XII. AFS Losses and HTM Fragility

XIII. Banks Compound the Crowding Out Dynamics

XIV. The Biggest Borrower Is the State

XV. Public Revenues Are Collapsing

XVI. A Budget as Bailout

XVII. The Sovereign–FX–Savings Doom Loop

VIII. Conclusion: The Real Story: Bailouts Everywhere

XIX. Encore: From “Manageable Deficit” to Crisis Trigger 

Notice: This will likely be my last post of 2025 unless something interesting comes up. Have a safe, relaxing, and enjoyable holiday season! 🎄🎅

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress 

From peso weakness to systemic unraveling: energy and fiscal bailouts, malinvestment, and the illusion of stability. 

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility 

On December 9, the USDPHP surged to a new record high—its third all-time highs since crossing the BSP’s 59-level “Maginot Line” on October 28. Yet despite the historic print, the pair has traded within an unusually narrow range—depicting active BSP intervention to suppress volatility 

This suppression of volatility has continued to date, with USDPHP retreating to the 58 level. The pair closed at 58.7 on December 19, roughly 0.9% below the record high of 59.22. 

Media outlets swiftly attributed the move to expectations of a BSP rate cut. Others defaulted to the familiar refrain of a “strong dollar.” 

II. Strong US Dollar Narrative Debunked 

Let us address the latter first. 

On the day the peso set a new record low, the US dollar weakened against 24 of the 28 currency pairs tracked by Exante Data. The Philippine peso stood out as one of only four Asian outliers—during a week when Asian FX broadly strengthened.

Figure 1

Moreover, the USDPHP has been on a steady ascent since May 2025, while the dollar index (DXY) peaked in September and has since shown signs of exhaustion. There is zero empirical basis to attribute this peso collapse to dollar strength. (Figure 1, topmost pane) 

But attribution often follows convenience—particularly when political patrons prefer comforting narratives. 

III. BSP’s Easing Cycle, Data vs. Narrative 

Now back to the first premise: interest rates as tinder to the USDPHP fire. 

Two days after the peso hit its latest record, the BSP announced its fifth policy rate cut of 2025 on December 11, the eighth since the easing cycle began in August 2024. This was accompanied by two reserve requirement (RRR) cuts—in September 2024 and March 2025—the latter bundled with a doubling of deposit insurance coverage. 

Why this aggressive easing? 

Like a religious incantation, the establishment rationalized BSP’s actions as growth stimulus. As the Inquirer noted, the BSP acted "as concerns about weakening economic growth outweighed the risks of peso depreciation." 

The BSP claims data-dependence. But has it examined its own history? 

Instead of catalyzing growth, repeated easing cycles have coincided with GDP deceleration— from 2012–2019, and again during the post-pandemic banking system rescue from Q2 2021 onward, even after interim rate hikes. (Figure 1, middle window) 

The much-cited “flood control” episode only emerged in Q3 2025, long after the damage was done. 

So the question remains: cui bono? 

IV. Cui Bono? (Redux) 

Certainly not MSMEs. 

The beneficiaries are balance-sheet-heavy incumbents with preferential access to credit, regulatory relief, and FX protection. 

Bank compliance rates for MSME lending fell to historic lows in Q3 2025 as headline GDP slowed to pandemic levels. (Figure 1, lowest chart) 

The post–Global Financial Crisis easing playbook produced the same result: banks found it cheaper to pay penalties than lend to MSMEs. 

Most tellingly, the BSP removed the MSME lending compliance data from its website last week. 

And why now?

Because the data exposes the failure of both the Magna Carta for MSMEs and the BSP’s easing doctrine: liquidity was created, but it never reached the productive economy—the transmission channel broke down. 

This is not a failure of transparency. 

The peso is not reacting to rate cuts as stimulus. It is repricing a regime in which monetary easing now functions as fiscal accommodation and elite stabilization—diverting and diminishing productive credit. 

Removing an indicator does not eliminate the risk factor—it merely eliminates early-warning signaling 

And elite debt is one of the central forces driving this policy response. 

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal 

As we have previously noted: “In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022.” (see reference, PSEi 30 Q3 and 9M 2025 Performance, November) 

And that’s just the PSEi 30. 

Financial fragility has intensified to the point that authorities have begun instituting explicit and implicit bailout measures. 

The regulatory relief via the suspension and forgiveness of real property taxes (RPTs) for independent power producers (IPPs) provided circumstantial—but powerful—evidence that the SMC–AEV–Meralco triangle was not an isolated deal, but part of a phased continuum: transactional camouflage, regulatory condonation, financial backstopping—ultimately leading to either socialization or forced liberalization. (see reference, Oligarchic Bailout—December) 

Crucially, the asset-transfer phenomenon in the energy sector is not confined to the SMC–AEV–MER axis. (see reference Inside the SMC–Meralco–AEV Energy Deal—November) 

Prime Infrastructure, controlled by tycoon Enrique Razon, acquired 60% of Lopez owned First Gen’s Batangas assets for Php50 billion. This occurred alongside broader liquidity-raising measures by the Lopez Group, including the sale of roughly 30,000 square meters of its ABS-CBN headquarters in Quezon City for Php 6.24 billion, and the termination of the ABS-CBN–TV5 partnership due to financial disagreements. 

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables 

At the same time, regulatory support has extended beyond asset transfers. 

The Energy Regulatory Commission (ERC) approved the collection of the Green Energy Auction Allowance (GEA-All) on top of the existing Feed-in Tariff Allowance (FIT-All), explicitly allowing renewable developers to recover costs directly from consumers. These mechanisms institutionalize tariff pass-throughs as balance-sheet support.

Figure 2

Aggregate data underscore the scale of the problem. As of 9M 2025, the combined debt of major listed renewable firms—AP, ACEN, FGEN, CREC, SPNEC, and ALTER—surged from Php Php490.1 billion in 2024 to Php 682.2 billion in 2025, a 39.2% increase! (Figure 2, topmost table) 

The sharpest percentage increases came from SPNEC, ALTER, and CREC. 

Taken together, debt is the common thread now binding the Philippine energy sector’s restructuring. 

Beyond the SMC–AEV–Meralco triangle, leverage stress is visible across ownership groups. First Gen’s heavy debt load, the Lopez Group’s asset disposals, and Prime Infrastructure’s acquisition of operating assets all point to balance-sheet defense rather than expansion. These are not growth reallocations but late-cycle capital triage. 

The Prime Infra–First Gen transaction fits the same pattern seen elsewhere: risk is being relocated, not resolved. Mature energy assets migrate toward entities best positioned to manage regulatory and political risk, while leverage remains embedded in the system. Market discipline is deferred, price discovery suppressed, and time is bought—without reducing aggregate debt exposure and systemic malinvestments

These are not M&A events. These are distressed-asset reallocations under sovereign protection. 

Renewables exhibit the same logic through a different channel. 

VII. Averch–Johnson Trap and Public Choice Theory in Action 

Under FIT-All and GEA-All, tariff pass-throughs convert private leverage into consumer-backed cash flows. 

This is the Averch–Johnson trap in practice: capital intensity and debt are rewarded, inefficiency is preserved, and default risk is implicitly backstopped—reaffirming public choice theory in action: concentrated benefits, dispersed costs; privatized gains, socialized losses. 

Firms such as SPGEN, ALTER, and ACEN are not anomalies. They are rational actors responding to a regulatory regime that socializes balance-sheet stress through electricity prices. 

All these said, asset transfers in conventional power and tariff-embedded support for renewables show that the sector is no longer allocating capital for efficiency or growth. It is preserving leverage. Whether through strategic transactions or regulatory pass-throughs, losses are being deferred and dispersed—into consumers, banks, and ultimately the sovereign—confirming that the energy sector has entered a late-cycle rescue phase rather than a genuine transition. 

In the Philippines, ESG is not a financing premium—it has become a political guarantee of revenue recovery. 

In essence, these bailouts are not energy policy. They are rent-seeking protectionism.  

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets 

But elite debt isn’t the only problem. 

For every borrower is a creditor—a counterparty. And banks are heavily exposed. 

Total financial resources (TFR) rose 6.76% to Php 35.311 trillion, with bank assets expanding faster at 7.2% to Php29.21 trillion last October. (Figure 2, middle image) 

Both sit at the second-highest nominal levels on record. Banks now hold 82.74% of TFR, and universal/commercial banks (UCs) account for 76.8% of that. UC banks make up 92.87% of total bank assets. 

The Bank-UC share of TFR has risen steadily since 2007—and the pandemic recession accelerated that centralization trend. 

Fundamentally, bank centralization of financial assets means:

• They dominate credit allocation and distribution.
• They generate and circulate most liquidity and money supply.
• In a low-volume, savings-deprived system, they are the dominant players in capital markets (stocks and bonds).
• They command the financial-intermediation process. 

A BSP-driven concentration of financial assets therefore escalates concentration risk. Yet almost no mainstream analysts address this. 

IX. Bank Liquidity Strains Beneath the Surface 

Even less is said about the intensifying liquidity strains in the banking system. 

Despite supposedly “manageable” NPLs, banks’ cash-to-deposit ratio hit all-time lows last October. Liquid assets-to-deposits plunged to 47.44%— a level last seen during the March 2020 pandemic outbreak—essentially erasing the BSP’s historic Php 2.3 trillion liquidity injection. (Figure 2, lowest graph) 

This signals that tightening bank cash reserves mirrors tightening corporate liquidity. 

And the pressures are not just from the elite portfolios—they span bank operating structure. 

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

Figure 3

NPL ratios have been propped up by a Wile E. Coyote velocity race: NPLs are near all-time highs, but their growth is masked by faster loan expansion. The 3.33% gross NPL ratio in October reflects gross NPL growth of 2.43% YoY versus 10.7% TLP growth. As long as credit velocity outruns impairment, the illusion of stability persists. (Figure 3, topmost visual) 

Yet NPLs also remain strangely “stable” even as GDP momentum breaks and unemployment rises—an inversion of normal credit dynamics. In a normal cycle, deteriorating growth and labor markets should push impairments higher; the fact that they don’t suggests suppression, rollover refinancing, and delayed recognition rather than genuine asset quality. 

Consumer credit cards illustrate the spiral—receivables at Php 1.094 trillion, NPLs at Php 52.72 billion, both at record highs. (Figure 3, middle diagram) 

Since 2020, the BSP’s rate cap and the recession pushed banks toward a consumer-credit model—where consumer credit growth now outpaces production loans. That dynamic amplifies inflation: too much money chasing too few goods. 

The consumer-loan share of UC lending (ex-real estate) hit a record 13.73% in October, while production loans fell to 86.27%—an all-time low. (Figure 3, lowest chart) 

XI. Keynesian Malinvestment and Policy Distortions 

This reflects Keynesian stimulus ideology—the belief that consumers can borrow and spend their way to prosperity. Its Achilles heel is the disregard for balance sheets and malinvestment risks. 

Banks have now wagered not only on elites but a widening consumer base—including subprime borrowers. And because participation in consumer credit remains limited, concentration keeps rising. 

Pandemic-era regulatory relief still suppresses benchmark NPL recognition.

XII. AFS Losses and HTM Fragility 

Simultaneously, banks accelerated balance-sheet leverage through Available-for-Sale (AFS) assets—another velocity game.

Figure 4

Losses in financial assets have slowed earnings. AFS exposure surged from 3Q 2023 to today, closing the gap with Held-to-Maturity (HTM). As of October, AFS and HTM made up 41.04% and 51.21% of financial assets, respectively. (Figure 4, topmost diagram) 

Financial-asset losses climbed from Php 16.94 B (1Q 2023) to Php 41.45 B (3Q 2025), which capped profit growth—banks earned just 2.5% more in 3Q 2025. (Figure 4, middle image) 

HTMs act as hidden NPLs and suppressed mark-to-market losses, worsening liquidity drought. Cash ratios peaked in 2013 and have declined ever since—mirroring the rise of HTM.

It’s no coincidence that record-high HTMs accompany the surge in banks’ net claims on central government (NCoCG). In October, NCoCG hit Php5.663 T (2nd-highest on record), and HTMs reached Php4.022 T (also near a record). (Figure 4, lowest graphs) 

Siloed government securities—rationalized under "Basel compliance"—combined with NPL overhang (consumer and likely under-reported production) and asset losses help explain slowing deposit growth. 

Velocity masking is inherently pro-cyclical. When velocity slows, NPL truth appears—all at once 

XIII. Banks Compound the Crowding Out Dynamics 

Banks are now forced to compete with elites and the government for scarce household savings.

Figure 5

Bank bonds and bills payable stood at Php1. 548 trillion in October 2025, down 3.44% YoY but still hovering near record highs. (Figure 5, topmost pane) 

To meet FX requirements and even assist the BSP in propping up Gross International Reserves (GIR), banks have increasingly tapped global capital markets. BSP data show the banking system’s external debt rose 0.3% to $28.97 billion in Q3 2025—its third‑highest level. BDO itself raised US$500 million through five‑year fixed‑rate senior notes in November 2025. (Figure 5, middle graph) 

Meanwhile, BSP’s Net Foreign Assets climbed 2.12% YoY, driven by a 26.3% surge in Other Deposits Corporation (ODC) FX assets—a growth spiral over the last three months that underscores a rapid FX-liquidity build-up outside deposit funding and a scramble for offshore liquidity. 

When banks become the transmission channel for fiscal deficits, corporate rescues, consumer support, and green‑subsidy pipelines, the endgame isn’t stability—it is deposit fragility, duration risk (asset‑liability mismatch), and the erosion of market discipline. These are the seeds of a balance sheet crisis, with BSP backstops looming ominously over a weak peso. 

XIV. The Biggest Borrower Is the State 

The biggest borrowers are not only the elites and the banks—the government itself stands at the center. 

Last September, the Bureau of Treasury signaled that public debt would ease toward year-end through scheduled amortizations and a slowdown in issuance. 

We warned that without genuine spending restraint; any dip would be a temporary statistical blip. 

And so it was. After two months of declines, public debt surged 9.6% YoY to Php 17.562 trillion in October—just Php1 billion shy of July’s record Php17.563 trillion. Local borrowings climbed 10.6%, outpacing external debt growth of 7.53%. 

Why would debt slow when deficit spending remains unchecked? 

XV. Public Revenues Are Collapsing 

Authorities and media largely ignored the mechanics behind October’s seasonal surplus (Php 11.154 billion), driven by a reporting artifact (the shift from monthly to quarterly VAT). 

They fixated on the headline numbers: a spending dip linked to the flood-control scandal, and 6.64% shrinkage in collections. 

The bigger picture was ignored: BIR’s 1.02% growth was its weakest since December 2023; Bureau of Customs fell 4.5%; non‑tax revenues collapsed 53.3% 

The 10-month numbers confirm structural decay: revenue growth slid to 1.13%, the weakest since 2020. Tax revenue growth of 7.45% is also at post-pandemic lows. BIR’s 9.6% is a four-year trough; BoC’s 0.9% has drifted toward contraction; non-tax revenues collapsed 36.7%—the weakest since at least 2009. 

A narrow decline in the fiscal deficit (Php1.106 trillion—third-largest on record) provides no comfort. With two months remaining, the deficit can surpass 2022’s Php1.112 trillion and approach 2021’s Php1.203 trillion—entirely dependent on tax performance. (Figure 5, lowest visual) 

Since GDP drives revenues, these numbers reaffirm the dynamic: slowing growth, rising unemployment, yet oddly “stable” NPLs—a contradiction sustained by velocity illusions. 

Expenditure growth may remain muted by political scandal, but revenue weakness is decisive. 

XVI. Debt and Debt Servicing Is Crowding Out Everything Else 

Record public debt now drives record servicing. As of October, Php1.935 trillion in debt payments has nearly breached the Php2.02-trillion 2024 record—a gap of barely 4.3% with two months to go. 

The identity is mechanical: (as discussed last August, see reference)

• More debt → more servicing → less for everything else
• Public and private spending are crowded out
• Revenue cannot keep pace with amortization
• FX depreciation and inflation risks accelerate
• Higher taxes become inevitable

This process is becoming more apparent by the month. 

XVI. A Budget as Bailout 

Yet ideology prevails. Despite weakening revenues and slowing nominal GDP, Congress has passed a record Php 6.793‑trillion 2026 budget. 

Figure 6 

The headline implies “just” a 7.4% increase from 2025, but because spending targets for 2025 were revised downward, the 2026 expansion is far larger once fully implemented. (Figure 6, topmost window) 

The cut to DPWH—politically expedient after a corruption uproar—was simply reallocated to entities like PhilHealth. No discipline, just reshuffling. 

Record spending in the face of a deteriorating economy is not stimulus—it is a fiscal bailout in progress. 

XVII. The Sovereign–FX–Savings Doom Loop 

An economy with an extreme savings-investment gap and a quasi-‘soft peg’ to the USD must fund deficits externally. Public sector foreign debt reached USD 90.6 billion in Q3—up 11.7% YoY, with a record 61% share of the total. (Figure 6, middle image) 

Every peso the state cannot fund through revenue must be sourced from bank balance sheets—through deposits, government securities, or offshore borrowing. The sovereign becomes a debtor to the banking system, and the banks become debtors to households. That is the sovereign–bank–household doom loop. 

This external financing occurs despite a stretched fiscal capacity: the Q3 deficit-to-GDP ratio of 6.63% was the fourth-widest on record, achieved at the expense of households via  intensifying financial repression and crowding-out. (Figure 6, lowest chart) 

Despite mainstream optimism about “manageable” fiscal health, current dynamics risk unraveling into fiscal shock. 

Monetary loosening—locally and globally—is masking fragility. When that cover fades, the peso absorbs the shock. 

VIII. Conclusion: The Real Story: Bailouts Everywhere 

While the public fixates on the corruption scandal, bailouts continue in real time—implicit and explicit, fiscal and regulatory. 

• The SMC–AEV–Meralco and Prime Infra–First Gen transactions are political rescue operations transferring assets among leveraged elites. 
• Direct relief has been delivered through taxpayer-funded suspensions (e.g., Real Property Taxes for IPPs) and electricity price hikes to sustain overleveraged “green” portfolios. 
• Record fiscal outlays shift resources toward the state, elite firms, and banks. 
• BSP’s easing cycle provides the monetary channel to accommodate the whole structure. 

This is not reform—it is redistribution upward. 

The great economist Frédéric Bastiat’s "legal plunder" describes the mechanism; Acemoglu-Robinson’s extractive institutions describe the outcome: enrichment of incumbents, depletion of the real economy, and accumulation of malinvestment. 

A fourth fault line left to be discussed: The Philippine real estate bubble. 

XIX. Encore: From “Manageable Deficit” to Crisis Trigger

2025 already saw GDP pull the rug out from under the institutional optimists. 

The next phase is simpler:

• Rising debt
• Weakening revenues
• Record spending
• External borrowing
• Peso strain
• Price pressures
• Monetary accommodation
• Banking-system transmission

This is how sovereign balance-sheet stress becomes a macro-financial shock.

The question is no longer whether debt climbs. 

It is whether the system can finance it without a solvency event. 

Will 2026 be the year national finances follow Ernest Hemingway’s arc—gradually, then suddenly? 

And when the adjustment comes, does the peso simply slip past 60—or does something in the system fracture before it gets there?

Because the endgame of fiscal ochlocratic social democracy isn’t fairness—it’s insolvency masked as compassion. 

_____

References: 

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

Prudent Investor Newsletter, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 7, 2025 

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

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025