Stagflation Part 19: Twin Deficits, a Third Inflation Wave, and the Bill for Free-Lunch Politics

deficit spending itself inhibits economic growth by causing the Federal Reserve to monetize the federal debt. The Fed lowering interest rates and increasing the money supply distorts the signal interest rates send to market actors. This distortion causes the boom-bust cycle that plagues the American economy—Ron Paul 

In this issue: 

Stagflation Part 19: Twin Deficits, a Third Inflation Wave, and the Bill for Free-Lunch Politics

I. One Imbalance, Two Record Deficits

II. The Debt That Slowed

III. The Export Boom That Imports Itself

IV. The Financial Repression Behind the Free-Lunch Politics

V. Three Markets, One Signal

VI. October: The Third Wave of the Inflation Cycle Affirmed

VII. Interventions Beget Interventions: From Minimum Wages to Struggling Labor Conditions

VIII. The Peso Rally is a Loan, Not a Fix

IX. Conclusion: The Bill Arrives 

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Stagflation Part 19: Twin Deficits, a Third Inflation Wave, and the Bill for Free-Lunch Politics 

Record deficits, a peso under siege, a banking system steering credit to the favored, and 7.8% inflation. Free-lunch politics wrote the check. The economy is paying it. 

I. One Imbalance, Two Record Deficits 

A country can consume beyond what it produces, but only by drawing on savings, borrowing from abroad, or running down existing resources. Free-lunch (social democratic) politics makes this imbalance politically attractive: subsidies, welfare spending, price controls, transfers, public works, regulatory mandates such as minimum wages, and deficit spending deliver immediate benefits while postponing the costs. The political rewards are immediate; the economic bill arrives later. 

Figure 1

The nine-month fiscal deficit reached a record Php 1.303 trillion, with Q3 alone registering an unprecedented Php 516.4 billion. (Figure 1, topmost and middle windows) 

The nine-month merchandise trade deficit also reached a record $47.158 billion, exceeding the previous 2022 record of $46.207 billion. 

Both deficits are now at record levels. The coincidence is not the argument; the underlying savings-investment imbalance is. 

But the deeper imbalance lies between national saving and domestic investment. 

Government deficits reduce public saving. Unless private saving rises sufficiently to compensate, national saving falls relative to domestic investment. The resulting savings-investment gap must be financed from abroad. This is the underlying connection between the fiscal imbalance and the external imbalance: the economy is absorbing more resources than its national saving can finance. 

The merchandise trade gap is only one side of the external imbalance. Remittances and services offset part of the deficit, but not enough to eliminate the external financing pressure. The current-account balance captures the broader relationship between national saving and investment, while the balance-of-payments (BoP) position, examined in Section VII, reveals the resulting external financing pressures. 

Part 17 documented eight months of twin deficits. One month later, both had widened. The imbalance was no longer merely persistent. It was growing. 

II. The Debt That Slowed 

September's national debt hit a record Php 19.66 trillion, but increased by only Php 53.46 billion during the month. That looks oddly restrained alongside a record Q3 fiscal deficit of Php 516.4 billion. The apparent disconnect deserves closer examination. (Figure 1, lower image) 

The slower monthly increase should not obscure the cumulative borrowing. National debt had increased by Php 1.952 trillion over the first nine months, the second-largest increase since 2021's Php 2.122 trillion. The nine-month fiscal deficit of Php 1.303 trillion was also 14.4% higher than the comparable Php 1.139 trillion figure. Even so, September's debt stock remained slightly below the Development Budget Coordination Committee's (DBCC) Php 19.77 trillion full-year 2026 target. 

A deficit is a flow; debt is a stock. How much of the deficit translates into additional reported debt, and when, depends on the financing mix, cash balances, debt repayments, and valuation adjustments. A smaller monthly increase in debt after a record quarterly deficit is not evidence of fiscal consolidation. It raises a more important question: where did the financing go, and through which channels was the government's borrowing absorbed? 

One place to look is the banking system. Net claims on central government (NCoCG) have been rising for years, reaching a historic Php 6.499 trillion in September, according to BSP data. This growing exposure matters because government financing does not take place in isolation from the rest of the financial system. Banks' expanding claims on government reflect the increasing absorption of financial resources by the sovereign.

Figure 2

Nor is this exposure confined to banks. In Q2 2026, net claims on central government held by other financial corporations (OFC) reached a record Php 3.18 trillion. BSP holdings stood at Php 491 billion, while banks held Php 6.339 trillion. (Figure 2, topmost pane) 

Combined, these positions totaled Php 10.012 trillion. This represented roughly 78% of the Php 12.84 trillion domestic debt stock. The broader point is that sovereign financing increasingly draws on financial resources held across the domestic financial system. 

This brings us to crowding out. As government borrowing competes with private borrowers—mostly elite owned corporations and banks—for domestic savings, it can push up borrowing costs, restrict private-sector access to credit, and divert financial resources from private investment toward government financing. The consequence extends beyond the immediate cost of borrowing: resources absorbed by the sovereign are resources that may otherwise have financed business expansion, productive investment, and capital formation. The government finances present spending demands while potentially constraining the productive capacity needed to support future growth. 

Financial repression can intensify this displacement. When political arrangements channeled through regulatory and monetary policies are redirected to favor sovereign financing or privileged borrowers, credit allocation becomes distorted. The issue is no longer simply how much the government borrows, but how institutional arrangements influence who gets access to credit, at what cost, and at whose expense. 

This concentration of financial-sector claims on the sovereign also creates the conditions for a sovereign-bank feedback loop. 

As financial institutions accumulate government exposure, their balance sheets become deeply intertwined with the government's fiscal position. 

As such, any deterioration in sovereign creditworthiness can transmit stress to financial institutions, potentially restricting private credit and increasing pressure for public support. Such support can further weaken public finances, reinforcing the original fiscal problem. The danger is not that this loop has necessarily reached its terminal stage, but that institutional arrangements are making the financial system have become chronically dependent on sovereign stability. 

Fiscal absorption, crowding out, and financial repression can therefore reinforce one another. The sovereign absorbs financial resources, institutional arrangements privilege its financing, and private capital formation becomes the residual claimant. 

The establishment blames peso depreciation for the record debt. That confuses an accounting consequence with the underlying economic problem. 

True, a weaker peso increases the domestic-currency value of foreign-currency-denominated debt, adding to the reported debt stock. But depreciation is a product of deeper external pressures, including the foreign-exchange demand generated by persistent financing requirements, capital-flow dynamics, and deteriorating confidence. Currency weakness is therefore not merely an accounting explanation of the debt problem. It is a symptom of the broader macroeconomic imbalance. 

III. The Export Boom That Imports Itself 

Philippine exports hit a record $9.87 billion in September, up 35.6% year on year. Electronics accounted for $6.92 billion, or 70.1% of total exports. Semiconductor exports likewise registered record year-on-year growth and a record share of total exports. (Figure 2, middle diagram) 

Much of this expansion rides the global AI boom, which has fueled demand for semiconductors, memory chips, and computing infrastructure. The Philippines is benefiting from this external investment cycle, but the concentration of export growth in electronics also exposes the economy to its reversals. 

But electronics were also the country's largest import category, at $5.80 billion, or 38.6% of total imports. The PSA's September tables show electronic exports increasing by $2.894 billion, against a $2.704 billion increase in electronic imports. (Figure 2, lowest tables) 

The export boom brings a substantial import bill with it. The relatively narrow difference between these incremental gross trade flows also underscores the importance of imported inputs in sustaining export expansion, although it should not be mistaken for a measure of domestic value added. 

The crux is: the concentration also creates and fosters vulnerability. If the AI investment cycle reverses, semiconductor orders and export momentum could drastically weaken. 

The current global technology selloff makes that risk harder to dismiss. 

Figure 3 

Meanwhile, consumer goods imports fell 4.25%, suggesting weaker household demand. Manufacturing's S&P PMI fell to 49.1 in October, its second consecutive month of contraction, with output, new orders, and employment all declining. (Figure 3, topmost visual) 

Exports are booming while domestic manufacturing contracts. The economy is riding an externally driven technology boom while its broader domestic production base shows signs of weakness. 

IV. The Financial Repression Behind the Free-Lunch Politics 

The government's financing requirements do not operate independently of the private economy. Financial repression extends crowding out beyond competition for savings. Through captive savings, directed credit, regulatory accommodation, and suppressed financing costs, financial arrangements can steer resources toward government and politically favored borrowers. 

Bank lending grew 11.4% in September, while M3 expanded 9.3% to Php 20.7 trillion. Slower money growth does not mean monetary contraction. M3 is still expanding on an already enlarged base, adding to the outstanding stock of money. 

Bank lending is also a channel of money creation. When commercial banks extend loans, they generally create matching deposit liabilities, expanding deposit money in the economy. Loan repayments, conversely, extinguish deposit money. The resulting purchasing power does not enter every sector equally; it flows through the credit allocation decisions of banks and the institutional arrangements shaping those decisions. The issue is therefore not simply how much money and credit are created, but where the newly created purchasing power goes. 

Electricity, water supply, and transportation and storage continued to register strong credit growth, while household borrowing continues to weaken.(Figure 3, middle chart)  Credit expansion was therefore far from uniform. 

This sectoral concentration becomes more interesting when viewed against the institutional landscape. Electricity and transport are not simply market sectors operating independently of political decisions. Their economics are heavily shaped by regulatory decisions, concessions, pricing arrangements, public policy, and government intervention. 

From power-sector tax relief and corporate deals (e.g., SMC-AEV-MER, Prime Infra-FGEN) to renewable-energy payment arrangements (discussed last year) and transport fare adjustments, political decisions influence the distribution of costs, revenues, and financial risks. The resulting credit expansion deserves examination not just as lending growth, but in terms of the activities and institutional arrangements it finances. 

Consumer lending continues to reveal sustained softening. Growth peaked at 25.63% in May 2024, reached another peak of 23.91% in August 2025, and then decelerated for 13 consecutive months to 16.17% in September 2026. Consumer credit is still expanding, but its growth impulse is weakening. (Figure 3, lowest image) 

The contrast exposes the uneven transmission of liquidity: aggregate credit continues to grow, but household credit is losing momentum while selected politically favored sectors maintain stronger expansion. 

Credit creation is not capital formation. A growing financial system does not automatically mean a growing productive economy. 

V. Three Markets, One Signal 

Emergency policies did not abolish adjustment. They displaced it. EO 110's price suppression, BSP relief measures, and the managed foreign-exchange regime shifted costs among government, corporate, bank, and household balance sheets. 

Those costs are now surfacing in three markets.

Figure 4

The peso repeatedly set new lows, breaking Php 64 to the dollar at the end of October.

BVAL Treasury yields across the 1-to-25-year curve climbed to multi-year highs.

Meanwhile, the PSEi remained within a managed range even as market breadth narrowed. (Figure 4, topmost and middle diagrams) 

The signals differ, but point toward the same underlying pressure: the growing cost of sustaining an economy whose imbalances remain unresolved. 

The BSP raised its policy rate by 50 basis points to 5.5%, an increase described by the media as ‘jumbo’ or ‘aggressive’. Yet with headline inflation at 7.8%, the policy rate remained deeply negative in real terms, at approximately -2.3%. 

The 2022–2023 experience offers a revealing precedent. Despite 350 basis points of rate increases between July 2022 and February 2023, lending growth slowed to 6.65% by September 2023, while M3 growth remained around 6–8%. Lending subsequently resumed its upward trajectory. Higher rates slowed credit expansion but did not reverse the underlying monetary and credit dynamics. (Figure 4, lowest graph) 

Higher interest rates cannot manufacture electricity, fuel, food, or productive capacity. They raise financing costs precisely when manufacturing demand and household credit momentum are weakening. 

The BSP was already behind the inflation curve in 2023. The same question confronts it now: does monetary tightening lead price adjustment, or merely follow it? A central bank reacting to already-established price movements can raise the price of credit, but it cannot retroactively create the goods whose scarcity helped drive inflation. 

The price of credit moved. The supply constraints did not. 

VI. October: The Third Wave of the Inflation Cycle Affirmed 

The monetary expansion examined earlier provides the financial backdrop to this inflation wave. Deficit spending sustains nominal demand, while the twin deficits and peso depreciation raise the domestic cost of imported goods and production inputs. The 2026 oil shock compounds these existing pressures.

Figure 5

October headline inflation reached 7.8%, the highest since February 2023, against just 1.7% a year earlier. Core inflation climbed to 5.4%, its fastest since September 2023, while inflation for the bottom 30% of households reached 9.5%. (Figure 5, topmost chart) 

Transport inflation surged to 20.1%, and rice inflation reached 20.7%, despite the price cap. (Figure 5, middle and lowest graphs) 

The oil shock lit the fuse; accumulated monetary expansion and continued credit creation provided the conditions for broader price pressures to persist. This is no longer simply an energy-price disturbance. The rise in core inflation points to a wider deterioration in purchasing power, extending beyond the immediate effects of higher fuel and food prices. 

The third wave has already surpassed the first wave's 6.7% peak in 2018 and stands just 0.9 percentage points below the second wave's 8.7% peak in January 2023. 

And 7.8% is not the entirety of the household experience. CPI tracks the prices of a defined basket, but cannot fully capture every deterioration in product quantity, quality, or value and even stealth charges. 

Shrinkflation, skimpflation, and sneakflation can erode purchasing power beyond what headline inflation communicates. Nor does the official index necessarily capture unrecorded transactions in informal and black markets. As an aside, authorities deny shrinkflation on some of commodities. 

Here is the thing: the problem extends beyond measurement. 

Official statistics influence monetary policy, government financing costs, indexed liabilities, wage adjustments, and collateral valuations. Governments therefore have powerful incentives to influence not only inflation itself, but also how inflation is measured, represented, and communicated. 

Benchmarkism is not merely about the numbers published nor the market’s headline output, it concerns the institutional incentives surrounding numerical representation and the economic decisions anchored to those benchmarks. Lower reported inflation can ease pressure on interest rates, government financing costs, and collateral valuations. 

Governments therefore have incentives to influence or even ‘manage’ not only economic and market outcomes, but also how those outcomes are measured and communicated. Argentina's statistical manipulation under the Kirchners illustrates that these incentives are not merely theoretical. 

We have been warning about this trajectory for years. 

In 2023, we argued that the slowdown in the second inflation wave would be a transition toward a more potent third wave, anchored in deficit spending and the BSP's priority of maintaining ample liquidity. 

"And yes, we may be seeing peak inflation for this second wave.  The first wave was in 2015-2018.  The cracks in bank lending have emerged while Treasury markets exhibit a sharp tightening.   

Furthermore, both banks and the BSP have scaled down their liquidity interventions.  The BSP has reversed most of the December injections.   

But the coming CPI slowdown may be a transition to a more potent third wave—all of which will be anchored on the path dependency politics of deficit spending by the executive branch and the priority of maintaining and expanding liquidity by the BSP. (Prudent Investor, 2023)" 

In 2025, before the infrastructure scandal and the 2026 oil shock, we warned of a fiscal shock and its stagflationary consequences. 

"As fiscal risks mount, so too does the potential for cross-sectoral contagion and cascading effects. The banking system—already struggling with liquidity depletion—faces heightened exposure due to its expanding claims on sovereign securities (implicit quantitative easing). 

Again, though partially obscured, stagflationary pressures, deteriorating credit quality, and rising funding costs may converge, amplifying broader macro-financial instability. 

In short, the fiscal storm is no longer a distant threat—it is approaching fast, and its first casualties may already be visible in the cracks forming across the financial system. " 

The third wave is no longer a forecast. It is showing up in the price data. 

VII. Interventions Beget Interventions: From Minimum Wages to Struggling Labor Conditions 

Price suppression postpones price adjustment. Subsidies shift the burden. Cheap credit props up claims, while currency defense consumes reserves. Each intervention creates pressures that invite another intervention. The adjustment is displaced, not eliminated. 

Western Visayas is the latest example. A Php 40–45 daily minimum-wage increase takes effect on November 19, following increases in Central Visayas and NCR. It cannot explain October's inflation, which has already been recorded. But it adds another cost to firms already facing dearer inputs, weaker orders, and tighter financing. Wages can be raised by decree; productivity cannot. Businesses absorb the difference through thinner margins, higher prices, reduced investment, or fewer jobs. Consumers ultimately pay part of the bill.

Figure 6

September's labor data reveal the deterioration beneath the employment headlines. (Figure 6, upper image) 

The labor force expanded by 629,000 month on month (MoM) to 53.19 million, but employment increased by only 543,000, while unemployment rose by 96,000 to 2.86 million. The employment rate slipped from 94.7% to 94.6%, while unemployment increased from 5.3% to 5.4%. Year on year, unemployment surged from 1.96 million to 2.86 million, and the employment rate fell from 96.2% to 94.6%. 

Part-time employment, despite retreating in September, has also followed a rising trend since January. (Figure 6, lowest graph) 

Fishing presents another revealing contradiction. Employment expanded by 303,000 in the quarterly comparison, while fisheries production value contracted 8.5% to Php 50.86 billion in Q3. Labor is entering an activity whose economic output is declining. This raises a more important question than the employment headcount: are labor and financial resources being sustained in activities that cannot generate adequate returns? 

These developments expose the deeper problem of capital allocation. Government can sustain economic activity through subsidies, transfers, and credit accommodation, but sustaining activity is not the same as generating wealth. Real savings finance productive investment; productive investment expands the capital base and creates sustainable employment via productivity. 

Hiring depends on expected profitability, precisely what stagflation undermines. Inflation erodes household purchasing power and real savings, while higher financing and operating costs raise the hurdle every new project must clear. Firms facing weaker demand and rising costs postpone investment and hiring. Add minimum wages to this pressure. 

The labor market is not simply adding workers; it is revealing the economy's declining capacity to absorb them productively. 

Employment headcounts cannot substitute for capital formation, and government-supported activity cannot substitute for wealth creation. 

VIII. The Peso Rally is a Loan, Not a Fix 

In response to the peso's record Php 64.17 close on October 27, President Marcos urged Filipinos not to panic. The peso subsequently returned to the Php 63 range, closing the week at Php 63.055. But the exchange-rate rally does not change the underlying balance sheet.

Figure 7

The September balance-of-payments deficit (BoP) reached $3.144 billion, bringing the cumulative January–September deficit to a record $9.087 billion, almost the BSP's entire $9.2 billion full-year projection. (Figure 7, upper chart) 

Meanwhile, Gross international reserves (GIR) fell further from $99.494 billion in September to $97.350 billion in October, a decline of $2.143 billion and a three-year low. (Figure 7, lowest visual) 

The record external deficit echoes the domestic financing imbalance examined earlier: net claims on central government have reached historic highs, reflecting the growing absorption of financial resources by the sovereign. 

A currency rally does not erase a record external financing deficit or replenish depleted reserves. The peso may recover temporarily, but the demand for dollars generated by the underlying imbalance remains. 

Defending the peso has costs. The BSP can supply dollars from reserves, but that depletes its external buffer. It can rely on foreign borrowing, but that adds liabilities. Foreign-exchange swaps and derivatives can provide temporary liquidity, but creates future obligations. The latter two adds to the “dollar shorts.” 

Alternatively, genuine monetary tightening would attack the debt financed savings-investment imbalance by withdrawing the liquidity that sustains excessive domestic absorption and demand for foreign currency. 

But this is where the debt trap becomes apparent. In an economy dependent on deficit spending, cheap credit, and continued liquidity to sustain politically protected claims, genuine monetary tightening would expose the accumulated malinvestments and debt dependency. Higher financing costs and shrinking liquidity would undermine debt servicing, force spending and investment contractions, and trigger recession or financial crisis. 

This is precisely why free-lunch politics resists genuine monetary restraint: it would expose the savings-investment gap that continued intervention has concealed. Yet postponing adjustment through further borrowing and monetary accommodation only deepens the dependency and increases the eventual cost. 

The country cannot indefinitely defend its currency while ignoring the fiscal, monetary, and external forces generating the demand for dollars. 

A peso rally can buy time. It cannot buy an external adjustment. 

IX. Conclusion: The Bill Arrives 

The third inflation wave is not an isolated statistical event. It is the cumulative outcome of fiscal expansion, monetary accommodation, financial repression, and the suppression of economic price signals. 

The oil shock intensified the process. The corruption scandal exposed its political costs. Neither created the underlying vulnerability. 

We warned of the fiscal shock before either event. 

The bill has arrived. The question is no longer whether the economy must adjust, but how much more real savings, purchasing power, and productive capacity will be sacrificed in the attempt to postpone that adjustment. 

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References: 

Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment, October 4, 2026 

Predictions on 

Fiscal shock… 

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

Third wave of the inflation cycle…

Philippine Core CPI Forged a New 22-year High! Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections, March 12, 2023

The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels

 

You can't do well in investments unless you think independently. And the truth is, you're neither right nor wrong because people agree with you. You're right because your facts and your reasoning are right. In the end, that's all that counts. And there wasn't any question about the facts or reasoning being correct—Warren Buffett 

In this issue: 

The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels

I. Ghost Month, Real Losses

II. The ICTSI Fulcrum Cracks

III. Breadth Confirms the Divergence

IV. From Prop to Drag: The Mechanics of Concentration in Reverse

V. Rotation Without Broadening: Speculative Capital in Search of the Next Punt

VI. The Arrière-Pensée: Confidence Is the Cover Story, Collateral Is the Point

VII. Conclusion: Benchmark-ism Meets Its Own Arithmetic 

The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels 

When one stock becomes the market, its reversal becomes the market's problem: August exposes the concentration, liquidity, and benchmark-ism beneath the PSEi's manufactured confidence 

In Part I we flagged ICTSI as the PSEi 30's single point of vulnerability. In Part II we showed how that vulnerability had metastasized into concentrated liquidity, shrinking participation, and outright benchmark-ism. August supplied the arithmetic Part II warned was coming. 

I. Ghost Month, Real Losses

Figure 1

August is conventionally excused as the market's "ghost month"—a superstition with Chinese roots, ironically applied by the establishment commentaries to a market that isn't Chinese. The historical record hardly justifies the fear: from 2010 through 2025, August produced gains in only six of sixteen years, with an average loss of a marginal -0.33%. Mostly noise. (Figure 1, upper window)  

This August wasn't noise. The PSEi 30 fell 4.49% month-on-month—the fourth-largest monthly loss since 2010—dragging the year-to-date return to roughly -1.60% and the year-on-year figure to -3.24%. (Figure 1, lower table)

Figure 2 

The damage was compressed: a single closing week's 4.52% plunge erased three months of the index's ICTSI-driven advance. (Figure 2, upper image) 

Ghost month or not, the mechanism behind the reversal is the one this series has tracked for some time, but which intensified last June: ICTSI had become the fulcrum propping up the PSEi 30, and a fulcrum that lifts a benchmark on the way up can just as easily accelerate its fall. 

The timing again matters. 

The final week's plunge did not arrive in isolation. 

On Friday, the USDPHP closed at Php 62.265, a record, extending Thursday's prior record-low close of Php 61.888. Markets were also absorbing the BSP's latest policy signals, and the 7-month record fiscal and trade deficits. (Figure 2, lower chart) 

The PSEi 30 fell in lockstep, down for a fourth consecutive session and closing below 6,000, erasing gains since June. 

A rate hike aimed at defending the currency and a benchmark sliding on the same day are not coincidences to be filed separately from the ICTSI story. They are another expression of the same "resistance to adjustment" pattern this (stagflation) series has tracked across fiscal, monetary, and FX-regime policy: administrative efforts to keep the peso, the yield curve, and the index from clearing at levels the underlying imbalances would otherwise dictate. 

When that resistance gives way on the currency side, it rarely leaves the equity side untouched—not when equity "confidence" was doing double duty as collateral support in the first place. 

II. The ICTSI Fulcrum Cracks 

The same stock that manufactured the June-July rally supplied most of August's decline. ICTSI fell 7.86% week-on-week and 8.1% month-on-month, accounting for roughly 46% and 48%, respectively, of the PSEi's weekly and monthly losses. 

This is simply capitalization-weighting running in reverse. The identical arithmetic that let one company's 57% first-half return mask a negative-6.8% average constituent return in Part II is now transmitting one company's reversal directly into the headline index. 

A benchmark built to amplify a single stock's ascent is, by the same construction, built to amplify its descent.

Figure 3

ICTSI's share of the PSEi's free-float market cap slipped to 25.58% by month's end, down from a peak of 27.37% in the first week of August. (Figure 3, upper pane)         

The combined weight of the top five constituents eased from July's peak of 56.12% to about 54.7%. 

Small retreats in percentage terms—large in what they signal: the "national team" support that Part II documented in the daily trading choreography appears to be losing its grip on the tape. 

III. Breadth Confirms the Divergence 

Beneath the headline, the market's breadth told a different story from the index. 

Only 10 of the PSEi's 30 constituents rose in August; the average constituent decline was roughly -2.92%—materially less than the benchmark's -4.49%, as ICTSI's outsized free-float market-cap weight amplified its decline in the headline index. (Figure 3, lower visual)

Figure 4

The divergence was even more pronounced during the final week's meltdown: only 7 of the 23 constituents that traded that week rose, while the average change was -2.78%—another example of how free-float market-cap weighting magnified the impact of ICTSI's decline on the benchmark. (Figure 4, upper diagram) 

Exchange-wide breadth stayed only marginally negative—1,783 advances against 1,818 declines—a spread nowhere near as lopsided as the ICTSI-driven index move would suggest. (Figure 4, lower image) 

That gap between a nearly even advance-decline line and a sharply negative benchmark is itself the tell: the index and the market it purports to summarize are increasingly telling two different stories, exactly as Part II's mid-year data showed in reverse. 

IV. From Prop to Drag: The Mechanics of Concentration in Reverse

Figure 5 

The unraveling wasn't confined to price. It showed up in the plumbing of trading activity too. ICTSI's % share of Main Board volume fell sharply from 28.23% in July to 21.91% in August as foreign flows shifted from net buying (Php 5.265B in July) to net selling (Php 1.59B in August). (Figure 5, upper graph) 

The same expansion in ICTSI's trading dominance that Part II attributed to both rising ICTSI activity and shrinking activity elsewhere is now reversing on both counts at once: as ICTSI volume recedes, there is no offsetting pickup in the rest of the market to cushion the loss of liquidity. 

The pattern increasingly resembles South Korea's KOSPI, where Samsung and SK Hynix now function as the index in practice. The difference is that Korea's concentration rides a global AI-hardware cycle with real earnings behind it; ICTSI's had no comparable confirmation from global port-operator peers, a point already established in Part II. (Figure 5, lower chart) 

Main Board volume fell 17.24% year-on-year to about Php 113.108 billion; aggregate turnover fell 4.5% to Php 142.976 billion. Cross trades made up 18.74% of Main Board volume, a four-month high—more of the exchange's already-shrinking activity conducted off the central order book, away from open price discovery. 

V. Rotation Without Broadening: Speculative Capital in Search of the Next Punt 

As the dominant ICTSI trade weakened, the other big caps failed to fill the gap—or the expected ‘rotation’ didn’t happen. Instead, trading activity shifted toward smaller, more speculative names—restructuring rumors, backdoor-listing chatter, M&A gossip—even as overall volume contracted. 

Near-even breadth on falling volume is not a healthy broadening of participation. It looks more like speculative capital searching for the next short-term story once the previous market leader loses momentum, not new capital entering the market on improved fundamentals. 

The extraordinary ICTSI ascent that carried the PSEi through June and July appears to have reached its inflection point. What follows this kind of top is rarely a broad-based handoff to the rest of the index; it's usually a scramble among smaller, thinner names while the index itself searches for a new prop. 

The progression is telling: from speculation to outright gambling, as capital searches less for value than for the next trade capable of replacing the momentum it has lost—more recipe for capital consumption. 

VI. The Arrière-Pensée: Confidence Is the Cover Story, Collateral Is the Point 

In Part II, we named this dynamic “benchmark-ism”: political and institutional narrative management that uses market and economic statistics to manufacture the appearance of stability—or to keep the Overton window of acceptable economic outcomes from shifting toward adjustment. 

August is the moment that narrative met its own arithmetic. 

Gains have always been projected as "confidence"—a rising PSEi as evidence of "resilience," useful for a leadership with sagging approval ratings and an economy absorbing the mounting tensions from the aftershocks of the Iran-war oil shock, EO 110's price-suppression architecture, and a cascade of BSP relief measures already tracked in this series. But confidence was never the only objective, and arguably not the primary one. 

Elevated equity prices are collateral. They support asset values on bank and corporate balance sheets, cushioning a financial system already leaning on the BSP's regulatory relief and foreign-exchange interventions to keep the credit cycle turning. 

Put bluntly: a rising PSEi, and specifically a rising ICTSI, was never just about optics. It was about propping up the collateral base that a decaying credit cycle depends on to keep rolling over. That is the arrière-pensée behind the applause Part II described—the second, unstated motive sitting behind the first. 

The trouble with using one stock as collateral infrastructure for an entire financial system is that the mechanism is symmetric. 

What inflates the collateral on the way up can deplete it on the way down, potentially at a leveraged pace 

August didn't just cost the PSEi 4.49%. It cost the system a slice of the very collateral cushion the whole exercise was designed to build. 

VII. Conclusion: Benchmark-ism Meets Its Own Arithmetic 

This isn't the first time a single Philippine equity story has been mistaken for—or dressed up as—a market. The DigiPlus [PSE: PLUS] gaming-stock bubble of 2025 ran on the same logic: a policy-fueled speculative vehicle inflated past any relationship to its fundamentals, celebrated rather than examined, until the arithmetic of momentum reversed on its own. 

We called that top in real time and traced its roots back to the same boom-bust pattern that took down BW Resources in 1999. 

ICTSI is a larger, more systemically consequential version of the same mechanism—dressed in blue-chip legitimacy instead of casino-stock notoriety, but running on identical fuel: concentrated, momentum-driven flows mistaken for confidence. 

• Part I called ICTSI the PSEi's single point of vulnerability. 
• Part II showed that vulnerability metastasizing into concentrated liquidity and narrative management.
• Part III shows what happens when the fulcrum that was doing the lifting starts doing the dropping instead. 

The PSEi was supposed to represent the market. But once the representation itself becomes something to be managed—because it communicates confidence and supports financial conditions—it begins to substitute for the reality it was meant to represent. That is the simulacrum. 

The episode reconfirms why the PSEi is becoming an increasingly unreliable gauge of the broader Philippine equity market—and, equally, a more fragile one: susceptible to substantial mispricing, disproportionate liquidity exposure, asset-bubble formation, rising concentration risk, and hidden leverage. 

Benchmark-ism can manufacture confidence for a while. It cannot repeal the arithmetic of the index it's built on.

___

References:

Prudent Investor Newsletters, The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market, July 19,2026 

Prudent Investor Newsletters, PSEi 30: The ICTSI Show, June 7, 2026

 

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation

 

Because credits springing from fiat inflation provide an easy financial edge, they have the tendency to encourage reckless behavior by the chief executives. This is especially the case with managers of large corporations who have easy access to the capital markets. Their recklessness is often confused with innovativeness—Jörg Guido Hülsmann 

In this issue:

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation

I. PSEi 30 1H: Record Revenue, Record Debt — And a 2.6% Economy

II. The PSEi 30 divergence

III. Debt: Concentration Makes The Story Worse

IV. Revenue: Where Did The Growth Come From? Meralco’s Money Illusion

V. Price Controls Don't Make The Real Adjustment Disappear

VI. Jollibee: Margin versus Volume Tradeoff

VII. SM Retail's money illusion

VIII. SMC: When Debt Becomes the Growth Mechanism

IX. Q2: Iran War’s Oil Shock Sharpens The Divergence; Three Balance Sheets, One Problem

X. The Corporate Face of Stagflation

XI. Conclusion: The PSEi 30 Earnings Mirage 

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation 

Record corporate revenue and debt expanded far faster than real GDP growth as policy-suppressed adjustment migrated into prices, margins, investment, and balance sheets. 

I. PSEi 30 1H: Record Revenue, Record Debt — And a 2.6% Economy 

The PSEi 30's 1H 2026 results look remarkably strong — until we ask a more basic question: strong in what sense? 

The figures below are reported corporate results. Even taking the reported numbers at face value, nominal growth in pesos is not, by itself, evidence of real economic growth in output. That is the relevant sense of “money illusion” here: mistaking a change in the unit of account for a change in the underlying quantity—or even quality. Once we make that distinction, the numbers are neither paradoxical nor contradictory. They are consistent with debt-financed nominal expansion occurring alongside weak real growth. 

Revenue surged. Assets surged. Cash surged. Debt exploded! But aggregate earnings fell. And all of this happened while Philippine real GDP grew just 2.6% in 1H and 2.3% in Q2. 

That is not a separate corporate story from the weak GDP, expanding fiscal deficit, and rising public debt already examined in Parts 13 and 14. It is the same story appearing on corporate balance sheets. 

The backdrop is familiar: EO 110's price-suppression scheme, the BSP's five regulatory relief measures, its warnings against NDF speculation, and the defense of the Php 61.75 ‘soft peg’ peso ceiling — all operating while inflation surged and the fiscal and trade deficits widened. Policy can suppress, redistribute, or postpone an adjustment. It cannot repeal the underlying real-resource constraint. 

The PSEi 30 shows where that adjustment appeared on corporate balance sheets. 

II. The PSEi 30 divergence 

1H 2026, aggregate 

Figure 1

Against that: 1H real GDP grew 2.6%, while Q2 real GDP grew just 2.3%. 

Revenue rose more than five times as fast as real GDP. Debt rose more than four times as fast. Net income fell. (Figure 1) 

The corporate sector, therefore, is not experiencing “strong growth” in the real-economy sense. It is experiencing rapid nominal and financial expansion alongside weak real growth. 

And the aggregate numbers conceal an important feature of that expansion: concentration. 

A handful of large conglomerates account for a disproportionate share of the increase in debt, as well as a substantial share of the revenue, assets, and cash behind the index. The result is that the PSEi 30 aggregate is increasingly shaped by the balance sheets of a few very large firms. 

III. Debt: Concentration Makes The Story Worse

Figure 2 

PSEi 30 nonfinancial debt rose by a record Php 654.171B. (Figure 2, upper table and lower chart) 

Twenty of the 26 nonfinancial members added debt. But SMC alone contributed Php 294.1B — roughly 45% of the entire increase — taking its own debt to an unprecedented Php 1.798 trillion, up 19.55% and equivalent to 28.8% of all PSEi 30 outstanding nonfinancial debt. 

The concentration extends beyond SMC. SMC, AEV, and Meralco — the parties to the SMC-AEV-MER gas/power asset transaction, part of the implicit utility bailouts examined last year — together accounted for Php 363.62B, or 56% of the entire increase in PSEi 30 nonfinancial debt. 

Yet, the three largest borrowers overall were SMC, AC, and ICTSI. 

This matters because concentration changes what the aggregate means. 

When the same large balance sheets dominate debt, revenue, assets, and cash simultaneously, the index is no longer a useful proxy for a broad cross-section of independent businesses. A handful of conglomerates increasingly determine the financial appearance of the whole. 

The scale is also significant. The Php 6.251 trillion of PSEi 30 nonfinancial debt is roughly 16.3% of the BSP's total financial-system resources. 

This is not merely a story about leverage inside individual companies. It is a story about the growing weight of a concentrated group of corporate borrowers within the financial system itself. 

SMC is the extreme case. Its Php 1.798 trillion of debt is larger than its entire 2025 revenue and more than eleven times its roughly Php 160 billion equity market capitalization. That is not presented as a conventional measure of debt capacity. It illustrates the mismatch between the financial claims accumulated by the conglomerate and the equity value the market assigns to those claims. 

Acquisitions, asset transfers, refinancing, and debt recycling have expanded SMC's financial structure well beyond the earnings capacity of several of its underlying segments. 

That is where Minsky's framework becomes useful — not as a label, but as a description of the financing process. 

The issue is not simply that SMC carries a large amount of debt. It is that an increasingly large financial structure depends on continued refinancing, asset transactions, and the ability to roll existing obligations forward while earnings growth remains uneven. When operating cash flow is insufficient to service the debt without continued refinancing or the realization of assets, the financing structure evolves to what Minsky called PONZI FINANCE: obligations can no longer be serviced from the cash flows generated by the underlying assets and require new borrowing, asset sales, or other financial transactions to remain current. 

A highly leveraged balance sheet is not automatically a Minsky problem. The problem emerges when the financing structure becomes dependent on the continuation of the financial process that created it. 

The BSP-FSCC's warning about a “wall of maturities” therefore looks different when viewed against this concentration. 

Refinancing risk is not distributed evenly across thirty unrelated companies. A large portion is attached to a relatively small number of very large balance sheets. SMC alone represents an unusually large share of the debt expansion behind the index. 

This also creates a systemic asymmetry. 

When debt becomes concentrated in conglomerates that are economically and politically difficult to allow to fail, leverage can create a form of too-big-to-fail risk even before an actual crisis occurs. The concern is not simply the size of any one company's liabilities. It is the interaction between corporate size, political importance, creditor exposure, and the concentration of those exposures within the banking and financial system. 

The BSP can describe the financial system as “resilient” at the aggregate level while significant fragility accumulates underneath that aggregate. A banking system can remain adequately capitalized while becoming increasingly exposed to the same large counterparties. 

Concentrated corporate leverage therefore exposes concentrated counterparty risk: the failure or forced deleveraging of one major conglomerate can transmit losses through several lenders and financial institutions at once. 

The same concentration also creates a crowding-out problem. 

The issue is not merely that government borrows more. Large corporations and government are drawing on the same underlying pool of financial resources. When conglomerates undertake increasingly large amounts of debt financing without a corresponding increase in productive real investment, they compete with government and other borrowers for savings and bank balance-sheet capacity—coming at the expense of MSMEs. 

That matters because the additional borrowing is not necessarily expanding the economy's productive capacity proportionately. If credit is increasingly being used for acquisitions, refinancing, asset transfers, and balance-sheet restructuring rather than for new productive capacity, the financial claim on future income can grow much faster than the real income available to service it. 

The result is a reinforcing process: 

weak real growth → nominal expansion → heavier corporate borrowing → concentrated leverage → greater refinancing dependence → greater financial fragility. 

The PSEi 30's headline growth therefore becomes less informative the deeper we look into its composition. Revenue is expanding, assets are expanding, cash is expanding, and debt is expanding — but earnings are not keeping pace, real GDP is weak, and an increasing share of the financial expansion is concentrated in a handful of very large borrowers. 

The divergence is not a statistical curiosity. 

It is the balance-sheet expression of the adjustment.         

IV. Revenue: Where Did The Growth Come From? Meralco’s Money Illusion

Figure 3

PSEi 30 revenue surged 13.51% — banks +10.95%, nonfinancials +13.8%. SMC, AEV, and Meralco were the biggest peso revenue gainers. At first glance, this looks like broad corporate resilience. But revenue is a peso measure: it tells us the value of transactions, not the quantity of goods and services behind them. (Figure 3, upper window) 

Meralco makes the distinction almost perfectly. 

Meralco: stagflation in miniature. Physical electricity sales barely moved — Q2 GWh rose just 0.66%, while 1H GWh fell 0.46% — essentially flat to contracting, tracking the broader slowdown. Yet peso electricity sales over the same periods rose 26.4% in Q2 and 17% for the half. (Figure 3, lower graph) 

This is the money illusion in the revenue numbers: the peso value of sales rose dramatically while the underlying physical quantity barely changed. The apparent expansion is therefore much larger in nominal terms than in real activity. 

Income followed the peso line, not the volume line: up 21.14% in Q2 and 12.7% for the half, on revenue growth of 24.65% and 15.7%, respectively. 

The wedge is FIT-All, GEA-All, and other generation/transmission pass-through charges — regulatory and redistributive add-ons, not demand. Consumers pay more through the bill; that additional revenue is redistributed through the system to generators, transmission, and designated energy programs, producing a much higher peso value without a comparable rise in physical consumption. That is the money illusion in concrete form: the peso value of electricity sales rises sharply while the underlying physical quantity barely moves. 

And the "resilient earnings" narrative carries its own balance-sheet cost. Meralco's debt rose 6.5% to a record Php 247.36 billion over the same window. Under the current structure, that increase is not simply additional corporate borrowing in the abstract. It forms part of the balance-sheet transfer associated with the SMC-AEV-MER transaction — the same process examined earlier in the context of the implicit utility bailouts. What appears in the aggregate as stronger revenue and earnings is therefore occurring alongside a redistribution of financial claims and liabilities across the corporate balance sheets. 

Meralco consequently captures both sides of the process in miniature: the nominal value of economic activity rises far faster than its physical volume, while the accompanying balance-sheet transfers create additional financial claims without a comparable expansion of real productive capacity. SMC shows the same process at far greater scale. 

V. Price Controls Don't Make The Real Adjustment Disappear 

Recent BusinessWorld/Bloomberg reporting on companies adapting to tight consumer budgets adds a useful, independent dimension here — corporate behavior confirming the balance-sheet read rather than just corroborating it after the fact. Shakey's Pizza Asia posted a one-third drop in first-half profit and is slowing expansion, citing inflation and fuel costs weakening non-essential spending. Jollibee itself, despite improved customer visits, cut its same-store-sales forecast, profit-growth outlook, and store-opening plans. Monde Nissin is switching to lower-cost ingredients and staggering price increases of 1-5% by product rather than raising prices outright. Century Pacific Food, after holding prices flat for two years, is now raising them 4-5% while planning smaller increases ahead. 

These are companies signaling, through their own operating decisions, that they read the demand environment as weaker than their revenue lines suggest — the same conclusion reached here from the balance sheets, arrived at independently from the boardroom. 

That reporting also points to a broader menu of adjustment worth naming explicitly. When firms can't or won't fully pass higher costs through the sticker price, the adjustment migrates elsewhere: 

• price inflation (raise the price),
• shrinkflation (keep the price, shrink the quantity),
• skimpflation (keep the price, cut the quality — Monde Nissin's ingredient substitution is a live example),
• sneakflation (keep the headline price but raise the effective price through less-visible fees or charges — for example, utility FIT-All and GEA-All charges, or added service, delivery, and platform fees)
• margin compression (absorb the cost),
• cost-cutting (trim inputs, labor, expansion — Shakey's slowing its rollout), or
• balance-sheet expansion (borrow, refinance, or transfer assets to keep the structure moving — SMC and Meralco).

The price can be capped; the loaf can't. It gets smaller, or the ingredients get cheaper, or the margin gets squeezed, or the investment gets postponed, or the debt fills the gap. 

Price suppression can suppress the price adjustment. It cannot suppress the underlying real-resource constraint — the adjustment simply moves to a different line item. 

VI. Jollibee: Margin versus Volume Tradeoff 

Jollibee Food Corporation’s Q2 net income rose 3% to Php 3.519 billion, but 1H net income was still down 16.7% to Php 4.928 billion.

Figure 4

Domestic sales rose 5.61% in Q2 and 6.8% in 1H, despite a 2.7% increase in store count. Against Q2 inflation of 6.8%, real domestic sales were essentially stagnant to negative. More stores generated only roughly inflation-level growth in peso sales. (Figure 4, topmost pane) 

JFC defended profitability where physical volume could not deliver it: margin over volume. That is a rational corporate response to constrained real demand, but it is not evidence of a booming consumer economy. With GDP growing only 2.3% in Q2, the more direct reading is that JFC was protecting margins in an environment where real domestic demand was weak. (Figure 4, middle diagram) 

JFC's balance sheet adds another dimension. Debt rose 13.6% to Php 93.2 billion over the same period. That increase should be read in the context of JFC's entire multinational financial structure — its international expansion and operations, acquisitions, and broader funding requirements — rather than reduced to a purely domestic story. But that broader scope does not make the debt irrelevant to the analysis. It shows that the company's nominal sales and earnings resilience is occurring within a substantially expanding balance sheet.

Jollibee therefore provides another expression of the same process: nominal sales can rise while real domestic volume remains weak; the corporation responds by protecting margins and adjusting operations; and the resulting performance sits within an expanding financial structure that extends beyond the domestic market. The peso-denominated numbers can therefore look resilient without representing comparable growth in the underlying quantity of goods and services. 

VII. SM Retail's money illusion 

SM Retail grew 5.42% in 1H 2026. At the parent-company level, SM Investments' revenue rose 7.53% and net income 6.38%, but those are consolidated figures covering businesses beyond retail. The relevant consumer-sector measure here is SM Retail's own 5.42% growth.(Figure 4, lowest image) 

That number looks less impressive against the inflation environment. Q2 CPI was 6.8% while core CPI 4.1%, meaning SM Retail's nominal growth was below the rate at which consumer prices were rising or slightly above the ex-food and ex-energy CPI. 

In purchasing-power terms, a 5.42% increase in retail activity does not represent real growth if prices were rising faster. 

There is another reason the number deserves scrutiny: SM's retail footprint was expanding at the same time. SM Prime opened two new Philippine malls in 2025 — SM City Laoag and SM City La Union — and opened SM City Zamboanga in March 2026, its 90th Philippine mall. Thus, the 5.42% growth in SM Retail occurred while the broader SM retail platform was adding physical capacity. 

That makes the result a useful indicator of the consumer-side stagflation problem. The business was not merely operating the same stores and selling at higher prices; the broader retail network was expanding as well. Yet SM Retail's nominal growth still lagged Q2 inflation. 

The distinction is the money illusion: more pesos can be recorded as sales without a comparable increase in the quantity of goods purchased. Some of the nominal increase can come from higher prices, while some can come from additional stores and retail capacity. What remains is the underlying real expansion in consumer demand. 

On the available figures, that real expansion appears weak. SM Retail was adding to its physical footprint, yet its nominal growth was still below the prevailing rate of consumer-price inflation. The headline 5.42% therefore overstates the strength of the underlying consumer economy when read without the price effect. 

SM Retail is consequently another expression of the same stagflationary process: the nominal economy grows, but purchasing power and real consumer demand do not keep pace. 

VIII. SMC: When Debt Becomes the Growth Mechanism 

SMC's nonfinancial debt increased by Php 294.1 billion in 1H 2026, reaching Php 1.798 trillion (!). Cash, assets, and revenue all surged. Income did not follow. Of SMC's eight segments, only three posted positive 1H income growth — infrastructure +29%, GSMI +3%, and food +8% — while the rest declined. 

Petron and Global Power delivered substantial revenue growth, but earnings moved in the opposite direction: Petron's fell 27% and Global Power's 7%. Revenue can therefore rise sharply without a corresponding increase in underlying profitability. 

Petron's case is particularly instructive because its revenue growth occurred amid an extraordinary oil-supply shock rather than normal operating conditions. The Iran conflict disrupted traditional Middle Eastern supply routes, prompting Petron to secure alternative sources. It purchased 2.48 million barrels of Russian crude as an emergency measure, with the government encouraging oil companies to find alternative supplies. This was not simply a normal sourcing decision or evidence of a structural improvement in Petron's operating economics; it was part of an exceptional policy and supply response to the disruption in support of EO-110. 

Media accounts that attribute SMC's earnings decline primarily to foreign-exchange losses and one-off gains associated with the SMC-AEV-MER transaction explain why reported income moved during the period. They do not explain the larger divergence: why did SMC add Php 294.1 billion of debt while earnings capacity across the conglomerate remained generally weak?

Figure 5

Nor is the Php 294.1 billion increase a one-off event. SMC's debt has been rising since at least 2013. The largest quarter-on-quarter increase occurred during the first oil shock in 2022, while the Php 129.57 billion increase in Q2 2026 was the second-largest quarterly increase since Q3 2022. The current surge is therefore another stage in an established process of balance-sheet expansion. (Figure 5, upper visual) 

The character of the borrowing matters. The cash-flow pattern shows that SMC is increasingly borrowing to refinance existing obligations, adding to the debt stock while earnings remain weak. This is the mechanism that brings Minsky's Ponzi-finance concept into view: when operating earnings are insufficient to reduce the debt burden, the financial structure becomes dependent on continued refinancing to sustain itself. Debt is no longer merely financing expansion; increasingly, further borrowing is required to maintain the existing financial structure—even as the cost of borrowing rises. (Figure 5, lower chart) 

This also gives the BSP's regulatory-relief measures and its warning about a “wall of maturities” a more concrete significance. The measures can be understood as institutional accommodation of a refinancing problem that has become increasingly important for large, highly leveraged borrowers such as SMC. They provide additional room for maturities to be rolled forward and the adjustment to be deferred; they do not eliminate the underlying liabilities. 

That is the deeper Minskyan concern. Refinancing postpones the adjustment, but does not remove it. When refinancing itself adds to the debt stock, the continuation of the financial structure increasingly depends on the availability of still more financing—and only an easy money environment accommodates this. 

SMC's 1H 2026 results therefore reveal a widening gap between financial (balance sheet) expansion and earnings capacity. Debt, assets, cash, and nominal revenue expanded rapidly while earnings remained generally weak. The balance sheet is no longer simply recording the growth process. Increasingly, it has become part of the mechanism sustaining it. 

IX. Q2: Iran War’s Oil Shock Sharpens The Divergence; Three Balance Sheets, One Problem

Figure 6

Aggregate Q2 net income grew just 1.79% — banks −0.02%, nonbanks +2.27%, with 19 constituents up and 11 down. Revenue, by contrast, surged 18.34% — nonbanks +19.13%, banks +11.99%.  (Figure 6, upper table) 

The Philippine banking system itself grew 7.62% in Q2—propped up by BSP relief measures despite pandemic era financial losses. (Figure 6, lower graph) 

Revenue +18.34% against income +1.79% is the sharpest single number in this piece: nominal activity expanded dramatically while the bottom line barely moved. The divergence is difficult to reconcile with the language of broad-based corporate strength. It is more consistent with an economy in which nominal values and financial claims are expanding faster than the earnings and real activity needed to support them. 

This is where the PSEi 30 closes the loop with the rest of the series. The government expanded its balance sheet to sustain fiscal spending, with public debt growing faster than nominal and real GDP. Banks expanded credit. Corporations expanded debt. Households absorbed record peso consumer loans. Real GDP grew only 2.3% in Q2. 

These are not separate phenomena. They are interconnected balance sheets. Government borrowing creates claims against future fiscal resources. Bank lending creates claims against future household and corporate income. Corporate borrowing creates claims against future corporate cash flows. The financial system can transfer purchasing power across time, finance acquisitions, refinance existing obligations, sustain operating structures, and facilitate asset transfers. But these transactions do not remove the underlying resource constraint; they redistribute claims against it. 

The more important question, therefore, is what happens when institutions repeatedly prevent those claims from being reconciled through structural adjustment? 

That is the significance of the policy sequence examined throughout this series.

• EO 110 suppresses or redistributes price adjustment.
• BSP regulatory relief accommodates stressed balance sheets.
• The exchange-rate regime resists adjustment in the currency.

Each intervention can relieve pressure in the short run, but the underlying imbalance does not disappear simply because its immediate expression has been suppressed. 

The adjustment is displaced — into quantities, quality, margins, investment, debt, refinancing, or other balance-sheet transfers. 

This is the institutional-control problem identified in Luc Lelievre's analysis of why apparently stable systems can become increasingly fragile: interventions that preserve stability at one point in the system can prevent the signals and adjustments through which underlying errors are corrected. 

The consequence is cumulative. When structural adjustment is repeatedly postponed, debt finance increasingly becomes the mechanism through which imbalances are carried forward. Balance sheets expand to absorb pressures that prices, markets, and institutions have been prevented from fully clearing. That can sustain nominal activity for a time, but it also permits malinvestment, misallocation, and financial claims to accumulate against an underlying real economy that is growing much more slowly. 

That is what the H1 2026 data reveal: not simply financial claims growing faster than output, but a system in which policy accommodation is allowing the divergence to persist and increasingly shifting the adjustment onto balance sheets. 

X. The Corporate Face of Stagflation 

The four companies examined above show four different margins of adjustment: 

• Meralco — physical output barely moves while peso revenue surges: price and redistribution. 
• Jollibee — sales barely keep pace with inflation while margins recover: margin over volume. 
• SM Retail — nominal sales growth remains below inflation despite an expanding retail footprint: money illusion and weak real demand. 
• SMC — debt, assets, cash, and revenue expand while earnings remain generally weak: balance-sheet expansion and refinancing. 

And beneath all four sits an adjustment that does not necessarily appear in headline financial statements: shrinkflation, skimpflation, sneakflation, margin compression, deferred investment, lower-quality substitution, and debt accumulation. The loaf gets smaller; the ingredient gets cheaper; the product becomes thinner; the expansion is postponed; the fee appears somewhere else; or the balance sheet absorbs the pressure. 

The price can be suppressed. The adjustment cannot. 

That is why the corporate response to stagflation cannot be read from CPI alone. The adjustment can move through price, quantity, quality, margins, investment, or debt, and different companies are choosing different combinations of the same underlying menu. 

What looks like stability in one line of the accounts can therefore represent adjustment somewhere else. And when policy repeatedly suppresses the visible adjustment, the hidden adjustment increasingly migrates into balance sheets — where it appears first as accommodation, then as leverage, and eventually as fragility. 

XI. Conclusion: The PSEi 30 Earnings Mirage 

Strong in what sense? 

The PSEi 30's 1H 2026 results look robust: revenue reached Php 3.974 trillion, assets Php 33.417 trillion and cash Php 1.608 trillion, but nonfinancial debt Php 6.251 trillion. 

Yet revenue grew 13.51% while real GDP grew only 2.6% in 1H and 2.3% in Q2. Debt grew 11.69% while aggregate net income fell 1.29%. The headline financial expansion is therefore not evidence of equivalent real economic expansion. 

That is the money illusion at the center of the PSEi 30. Nominal values rise and create the appearance of growth even when the underlying quantity or quality of economic activity does not rise proportionately. Meralco's peso electricity sales rose sharply while physical consumption barely moved. Jollibee's domestic sales grew roughly at the rate of inflation. SM Retail's nominal growth remained below inflation despite an expanding retail footprint. SMC's debt, assets, cash, and revenue expanded while earnings remained generally weak. 

But the money illusion does not arise in isolation. It is the financial appearance produced by the stagflationary process. Real growth remains weak while prices rise, purchasing power is constrained, and the adjustment that would ordinarily expose the imbalance is repeatedly suppressed, redistributed, or postponed. EO 110, BSP regulatory relief, and the exchange-rate regime operate on different parts of that adjustment process. They can alter where the pressure appears without eliminating the underlying constraint. 

The result is a displacement of adjustment. It appears in prices, volumes, product quality, margins, investment, debt, and refinancing. What cannot be absorbed through the price is absorbed through quantity; what cannot be absorbed through quantity is absorbed through quality or margins; what cannot be absorbed operationally can migrate onto the balance sheet. Financial expansion can therefore continue even while real economic expansion remains weak. 

That is what the PSEi 30 adds to the stagflation series. The corporate sector does not merely reflect weak growth and inflation; its balance sheets show how the economy is absorbing the adjustment. Nominal revenue can surge while real demand stagnates. Debt can expand while earnings weaken. Financial claims can accumulate while productive capacity and real output lag behind. 

The price can be suppressed. The adjustment cannot. 

The PSEi 30 is where that adjustment becomes visible in corporate form: stagflation underneath, money illusion on the surface, and balance-sheet expansion in between. 

____

References: 

Prudent Investor, Stagflation Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026 

Prudent Investor, Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment, August 2, 2026 

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

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

Luc Lelièvre, Why Stable Systems Fail: The Illusion of Institutional Control, Mises.org, May 18, 2026