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

 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation

  

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless—Ludwig von Mises 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation

I. Preamble: Interconnectedness of All Economic Phenomena 

II. Following the Money: The Balance-Sheet Origins of Inflation

IIA. Why This Matters: From External Discipline to Domestic Bailout

IIB. Following the Credit: Electricity and the New Transmission of Liquidity

IIC. When Balance Sheets Become Policy: From Liquidity to Prices

III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices

IIIA. Administrative Suppression Is Not Price Stability

IIIB. The Poor Continue Paying the Highest Inflation Tax

IIIC. Benchmarkism and the Illusion of Labor Absorption

IIID. Wage Mandates and the Intervention Spiral

IV. Conclusion: Inflation Before Prices 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation 

Why Consumer Prices Reveal the Consequences, Not the Beginning, of the Process 

I. Preamble: Interconnectedness of All Economic Phenomena 

Economic commentary often treats macroeconomic releases as though they describe separate realities. Bank lending is analyzed independently of inflation. Labor market statistics are discussed apart from monetary policy. Wage adjustments are framed as social policy, while electricity is relegated to industry news. Each release receives its own headline, its own narrative, and then quickly disappears into the next news cycle. 

Yet the economy functions as an interconnected process rather than a collection of isolated indicators. 

As Ludwig von Mises observed, economics "does not allow of any breaking up into special branches." It is concerned with "the interconnectedness of all phenomena of acting and economizing." Economic facts condition one another, and each problem can only be properly understood within a broader system that assigns its due place to every aspect of human action and economic choice. 

Money created through the banking system finances specific borrowers. Credit helps determine which investment projects become financially viable, influencing the allocation of resources, production costs, employment, asset prices, and eventually consumer prices. Monetary developments therefore propagate through the economy sequentially rather than simultaneously. 

The political environment further shapes this process by influencing the prevailing model of economic development. Governments frequently respond to the unintended consequences of earlier interventions with additional interventions. Each successive policy alters incentives, redirects capital toward politically favored sectors, and generates new distortions that invite further intervention, progressively reducing the economy's capacity to adjust through market processes. 

These developments are not isolated events. They represent successive stages of the same underlying process. 

The Philippine economy today provides an instructive example. 

• The BSP's May 2026 universal-commercial banking statistics showed another acceleration in money and credit growth. 
• The June CPI inflation report simultaneously revealed softer headline inflation but broader underlying price pressures. 
• The May labor report appeared to indicate slightly ‘improving’ employment conditions even as business investment remained subdued. 
• Meanwhile, Metro Manila received its ‘historic’ mandated wage increase in years, justified as protection against the rising cost of living. 

Conventional narratives frame these developments as isolated economic events. In reality, they form an interconnected process that reflects the deepening consequences of balance-sheet expansion, politically driven credit allocation, and successive policy interventions. 

The sequence matters because inflation does not begin at supermarket shelves, gasoline stations, or electricity bills. Nor does it begin with the consumer price index. By the time consumer prices visibly accelerate, the underlying monetary and financial adjustments have often been unfolding for a period. Markets respond to underlying conditions. What is seen as inflation is, therefore, a symptom. 

The process begins elsewhere. 

It begins with the expansion of balance sheets. 

II. Following the Money: The Balance-Sheet Origins of Inflation 

One of the recurring shortcomings of contemporary macroeconomic analysis is its tendency to treat inflation primarily as a phenomenon of price changes. 

Policymakers, talking heads, and financial markets closely monitor consumer price indices because they are readily observable, politically salient, and easily communicated. Rising food prices, higher electricity bills, and more expensive transportation become the visible face of inflation. 

Because consumer prices are both politically sensitive and immediately observable, inflation is also commonly framed as a problem originating in markets rather than in monetary or policy decisions. The mechanical focus is on the supply side. Thus, the resulting narrative emphasizes shortages, speculation, supply-chain disruptions, hoarding or price gouging, encouraging corrective political interventions, while the monetary and administrative policies that altered purchasing power and resource allocation receive comparatively little or no scrutiny at all. 

Yet the price changes captured by official statistics describe only one observable manifestation of a much broader monetary and financial process. 

Consumer price indices summarize exchange ratios over a given period; they do not reveal how the purchasing power underlying those transactions was created, allocated, and transmitted throughout the economy. 

Before consumer price indices register sustained inflation, balance sheets have often been expanding for months. Before households pay more at the grocery, someone must first acquire additional purchasing power. Before firms bid more aggressively for labor, raw materials, or imported inputs, someone must first obtain financing that enables such spending. 

Within the financial system, the interaction of savings, credit creation, monetary policy, and bank intermediation determines how purchasing power is created, allocated, and transmitted throughout the economy. 

These financial adjustments reshape resource allocation, investment decisions, production structures, and distribution, eventually influencing employment, incomes, spending patterns, and consumer prices. 

Periods of monetary accommodation magnify the imbalances (excess leverage, credit concentration, politically directed finance, sectoral distortions) that developed in the process. 

Monetary conditions have evolved through successive phases rather than discrete episodes. The BSP's earlier pandemic-era monetary expansion was followed by a period of policy tightening to contain rising inflation. Beginning in the second half of 2024, however, the BSP gradually shifted toward monetary accommodation through successive reductions in policy rates and reserve requirements. Rather than immediately accelerating consumer prices, these measures first affected the financial system by lowering funding costs, intensifying the expansion of banks' capacity to extend credit, increasing system-wide liquidity, and encouraging further balance-sheet expansion. 

These changes in monetary and credit conditions propagated or diffused gradually through the economy. As new purchasing power entered through bank lending and other financial channels, it influenced financing decisions, resource allocation, investment activity, and "aggregate demand" before becoming fully reflected in consumer price measures. 

The BSP's May 2026 Depository Corporations Survey (DCS) illustrates this transmission process. 

Broad money continued to accelerate for a fourth consecutive month.

Figure 1

M3 expanded by 12.8 % year-on-year, following growth of 10.3 % in February, 12.1 %in March, and 12.2 %in April. (Figure 1, topmost pane) 

While the various monetary aggregates have not followed identical trajectories over recent years, the May data point to increasingly broad-based liquidity conditions. 

• Cash in circulation, which had recently trailed the other aggregates in growth, rebounded.
• M1’s growth trend remained robust, sustaining the momentum from its earlier expansion in 2023.
• M2 and M3 growth accelerated in Q2 2025, showing that monetary expansion had become more widely distributed across the financial system rather than concentrated in a single aggregate. 

The significance of these figures lies not merely in their magnitude but in what they reveal about the sources of liquidity. 

The current acceleration in liquidity growth echoes the BSP’s pandemic‑era response. And while the DCS shows that domestic credit remained the principal driver of monetary expansion, the transmission channel has shifted. 

Banks net claims on central government (NCoCG) rose 16.2% to Php 6.4 trillion. (Figure 1, middle image) 

Claims on the public non‑financial sector accelerated even more rapidly, surging 41.2%, coinciding with the DOF’s proposed record remittances of GOCCs to the national government. Are banks financing the GOCC remittances? 

Lending to the private sector also strengthened to 13.2%, though at a more moderate pace. 

The banks’ net claims share of domestic claims stood at 27.1% in May 2026, slightly down from the record 27.6% in May 2024, while claims on the private sector reached 64.23%, sharply lower despite recovering from its interim trough in Q4 2023. Since the pre‑pandemic year 2019, bank net claims on the central government have taken an increasingly larger share of domestic claims—a clear sign that liquidity creation now stems primarily from bank financing of the government. (Figure 1, lowest diagram)

Figure 2

In the meantime, BSP’s net claim on central government (NCoCG) growth doubled in May to Php 662.6 billion, though it remains below pandemic levels. (Figure 2, topmost window) 

In sum, these developments suggest that the recent acceleration in monetary growth has been driven primarily by continued domestic balance-sheet expansion by banks and the government-BSP complex rather than by external sources of liquidity. 

Although the current expansion differs from the pandemic response in both scale and transmission mechanism, its underlying balance-sheet logic is strikingly similar. Liquidity is once again being created through coordinated expansion of public and banking-sector balance sheets—not primarily to finance new productive activity, but to sustain an increasingly leveraged economic structure. 

Unlike 2020, the current process operates largely through the routine mechanisms of government finance, central-bank operations, and bank credit rather than emergency facilities. 

Nevertheless, the recurring liquidity injections exhibit the characteristics of a quasi-bailout whose monetary consequences gradually diffuse through the economy before becoming visible in consumer prices. 

IIA. Why This Matters: From External Discipline to Domestic Bailout 

For many years, discussions of Philippine liquidity focused primarily on external sources of monetary expansion—remittances, export earnings, business process outsourcing receipts, tourism revenues, foreign portfolio flows, foreign direct investment, and movements in the country's international reserves. 

These external inflows undoubtedly influence domestic liquidity conditions. Historically, the accumulation of foreign exchange reserves also imposed an important discipline on domestic monetary expansion, as the BSP's balance sheet remained closely linked to developments in the external sector. 

Over time, however, the growing financing requirements of the domestic economy increasingly shifted the source of monetary accommodation inward. 

Ever since the 1997 Asian crisis, the BSP built up foreign reserves, which held nearly fixed at ~86–87% of assets from 2012 to 2018, culminating in 2019. Pandemic injections of $2.3 trillion cut that share to ~72%, as historic liquidity infusions raised domestic securities to nearly 20% — exposing peso fragility. (Figure 2, middle graph) 

While BSP has since reduced its domestic securities share and rebuilt reserves, banks now carry the burden of financing sovereign liabilities. 

As an aside, strangely, the BSP has yet to publish its monthly updates for 2026 

Consequently, this reinforced the larger role of domestic credit creation in expanding liquidity — a greater reliance on internally generated purchasing power rather than external inflows. 

Equally revealing are developments on the liability side of the banking system. 

Deposit substitutes—including money-market borrowings, promissory notes, and commercial paper—accelerated sharply. After expanding by just over 10 % year-on-year in February, their growth surged to nearly 74 % in April before approaching 95 % in May. Wholesale funding has therefore become an increasingly important source of financing for continued balance-sheet expansion. (Figure 2, lowest chart) 

The changing composition of bank liabilities provides important clues about conditions within the financial system. Rather than merely reflecting a preference for alternative funding structures, the growing reliance on wholesale liabilities suggests that banks theoretically are adapting to funding, regulatory, and balance-sheet constraints while sustaining asset growth. It also reflects the increasingly important role of market-based financing in supporting credit creation when traditional deposit growth alone becomes insufficient. 

That evolution carries important implications. 

Conventional narratives often portray banks as simple intermediaries that collect household savings before lending those funds to borrowers. Modern banking systems operate differently. Through credit expansion, bank lending simultaneously creates deposits, expanding both assets and liabilities on bank balance sheets. 

The composition of those balance sheets, however, is equally important. As a growing share of bank assets becomes concentrated in public-sector claims and other policy-influenced lending, while portions of private-sector credit remain constrained by weaker credit quality and elevated non-performing loans, the organic growth of deposits becomes less sufficient to sustain continued balance-sheet expansion. The sharp increase in wholesale liabilities therefore appears less a voluntary shift in funding strategy than an institutional response to mounting balance-sheet pressures, with banks increasingly relying on market-based funding to support continued liquidity creation. 

Understanding this mechanism fundamentally changes how monetary statistics should be interpreted. 

Liquidity is not merely a passive consequence of economic activity. It is created through identifiable balance-sheet transactions that determine who first receives newly created purchasing power, under what conditions, and for what purposes. 

This is where aggregate monetary statistics become insufficient. 

Headline M3 describes the resulting expansion of liquidity. It does not reveal how that liquidity was created, through whose balance sheet it entered the economy, or which borrowers received the newly created purchasing power. 

Money does not enter the economy uniformly. New purchasing power enters through specific borrowers, particular industries, and identifiable financial channels before gradually spreading throughout the broader economy. Those early recipients acquire the ability to bid for labor, raw materials, imported inputs, financial assets, and productive resources before the nominal incomes of later recipients adjust. Relative prices therefore begin changing well before those adjustments become visible in aggregate price indices. 

Price changes themselves reflect the interaction of supply and demand. Without additional money or credit to finance higher spending, stronger demand in one part of the economy generally requires weaker demand elsewhere. Generalized inflation therefore requires an expansion of purchasing power beyond the mere redistribution of existing income and savings. Even supply shocks initially alter relative prices; they become broader and more persistent only when accommodated by monetary expansion. 

As the late Nobel Laureate economist Milton Friedman reminded us: inflation is always and everywhere a monetary phenomenon — produced only by a more rapid increase in the quantity of money than in output. 

This is why some industries expand more rapidly than others. Certain asset prices appreciate long before consumer prices accelerate. Input costs often rise months before those increases appear in finished goods. The process is neither instantaneous nor evenly distributed. It unfolds according to the channels through which money and credit enter the economy. 

The balance sheet therefore provides the first map of inflation's transmission. 

If the Depository Corporations Survey explains how liquidity is created, the BSP's lending statistics reveal where that newly created purchasing power is increasingly being directed.

That question is particularly revealing in the current Philippine context. 

Aggregate lending growth accelerated during May. Yet the headline figure conceals a more important structural development. The composition of credit—not merely its quantity—provides the more meaningful signal. 

Among all sectors of the economy, one has emerged as the largest destination for new bank financing. 

The electricity sector. 

IIB. Following the Credit: Electricity and the New Transmission of Liquidity 

If the Depository Corporations Survey (DCS) reveals the expansion of monetary and banking-system balance sheets, the BSP's Universal and Commercial (U/C) Bank Lending data reveals how newly created purchasing power is allocated across sectors of the economy. Together, the two datasets provide complementary views of the same process: one identifies the expansion of liquidity within the financial system, while the other shows where credit creation is concentrated. 

The May lending report continued to show a rapid pace of credit expansion. Total outstanding loans of universal and commercial banks accelerated from 11.84 %year-on-year growth in April to 12.62 %in May, extending the recovery in bank lending that followed the BSP's shift toward monetary easing. 

On the surface, these figures suggested improving financial conditions and stronger economic activity. 

Aggregate lending growth, however, reveals only the quantity of credit creation. The more important question is where that credit is being allocated.

Figure 3

Consumer lending, which had been one of the principal drivers of post-pandemic credit expansion, continued to decelerate gradually while remaining elevated. Consumer loans slowed from 19.58 %to 19.03 percent, while credit-card lending eased slightly from 26.57 %to 26.30 percent. (Figure 3, topmost visual) 

Household borrowing therefore remained strong, but it was no longer the dominant source of credit expansion.

Production lending moved in the opposite direction. 

Loans to production activities accelerated from 10.70 %to 11.67 percent, suggesting that banks were directing a larger share of new lending toward business-related activities rather than household consumption. Under normal conditions, such a shift would generally be interpreted as favorable, as productive investment should expand capacity, increase output, and support long-term economic growth. 

The sectoral composition of production lending, however, reveals a more complex picture. 

Among major industries, electricity, gas, steam, and air-conditioning supply recorded the strongest expansion by a wide margin. Outstanding loans to the sector increased by 31.65 % year-on-year, accelerating from 25.83 %in April. (Figure 3, middle image)

More significantly, electricity accounted for the largest absolute increase in bank lending among all industries, adding approximately Php133.3 billion in a single month and roughly Php539.2 billion over the preceding twelve months. 

As a result, the sector's share of total universal and commercial bank loans increased from 12.2 %in May 2025 to 14.5 %by May 2026, reaching its highest level since the BSP began publishing the current series! 

This is not simply another industry experiencing rapid credit growth. 

It represents a significant reallocation of the banking system's balance sheet. 

Balance sheets often reveal structural changes before those changes become visible in national income statistics. Financing patterns, investment decisions, and credit allocation frequently adjust before their consequences appear in GDP, employment, or consumer-price data. Following the money therefore requires examining not only how much credit is created, but also which sectors receive that credit. 

This pattern also reflects broader developments within the Philippine electricity sector. 

Our previous analysis examined how mounting financial pressures within the industry were increasingly addressed through institutional restructuring, financing arrangements, and regulatory adjustments rather than through explicit fiscal appropriations. A series of developments pointed in the same direction: the SMC–Aboitiz Equity Ventures–Meralco (Chromite) Batangas LNG deal, Prime Infrastructure's acquisition of First Gen, the suspension of real-property taxes (RPTs) on power assets, and the introduction of the Government Energy Auction Allowance (GEA-ALL) on top of the existing FIT-ALL mechanism. Although different in form, these measures reflected a broader effort to maintain the financial viability of a strategically important sector while limiting reliance on direct fiscal support. 

The important observation is that the banking system has become an increasingly important channel through which financing reaches the electricity sector. Given that electricity-sector output has remained weak despite rapid credit expansion, the increase in lending raises questions beyond simple investment financing. Electricity GDP has stagnated since Q2 2025 (Figure 3, lowest graph) 

This reflects a quasi‑bailout scheme channeled through refinancing requirements, balance‑sheet restructuring, and regulatory incentives. 

Government‑affiliated private sector balance sheets absorb pressures that would otherwise appear on public accounts. Rather than showing up as fiscal expenditure, burdens are transferred via corporate restructuring and commercial banks, facilitated by regulatory adjustments. The cost does not disappear; it migrates across balance sheets, masking fragility under the guise of restraint. 

In this environment, the boundary between monetary policy, industrial policy, and financial-sector policy becomes increasingly difficult to separate. 

Credit allocation does not require formal central planning to influence economic outcomes. Once liquidity expands within the banking system, institutions respond to incentives, regulations, collateral conditions, risk assessments, and political priorities. The resulting allocation of credit reflects not only private lending decisions but also the broader institutional environment in which those decisions occur. 

This is why following the money requires following the balance sheet rather than the budget alone. 

The modern transmission of policy increasingly operates through credit markets. 

IIC. When Balance Sheets Become Policy: From Liquidity to Prices 

The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated. 

The May DCS and lending reports reveal two dimensions of the same process. The DCS shows the continued expansion of liquidity through domestic credit creation, while lending data reveal how that purchasing power is distributed across sectors. Credit directed toward different uses—financial assets, real estate, consumption, infrastructure, utilities, or government financing—produces different effects on investment decisions, resource allocation, and relative prices. 

The transmission from monetary expansion to consumer prices is therefore neither immediate nor uniform. Newly created purchasing power enters the economy through specific financial channels, affecting particular borrowers and sectors before broader price effects emerge. 

The May balance-sheet and lending data indicate that these earlier stages of the process remain active. Liquidity continues expanding, domestic credit remains the principal source of monetary growth, and bank lending increasingly reflects sectoral concentrations, including electricity. 

June's inflation report should therefore not be interpreted as an isolated movement in consumer prices. It represents a later stage of a monetary and credit process already visible within the financial system. 

The balance sheet reveals where the process begins. Consumer prices reveal where it eventually appears. 

The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated. 

III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices 

Having followed the creation of liquidity through the banking system and traced its allocation across the economy's balance sheets, the analysis now moves to where these monetary processes become most visible: consumer prices. 

June's inflation report was widely interpreted as evidence that inflationary pressures were easing. Headline consumer price inflation declined from 6.8 %in May to 6.4 percent in June, reinforcing the view that price pressures were gradually moderating and that recent policy measures were beginning to stabilize conditions. 

The underlying picture, however, was more complex.

Figure 4

The decline in headline inflation was driven primarily by a factor external to domestic monetary conditions: the sharp reduction in global oil prices. West Texas Intermediate crude declined by more than 23 % during June, easing one of the most significant cost pressures affecting households and businesses. (Figure 4, topmost window) 

Transport inflation correspondingly slowed from 16.2 %to 12.8 percent, contributing substantially to the moderation in the overall index. (Figure 4, middle image) 

Had inflation been primarily a fuel-price phenomenon, the decline in headline inflation would have represented a broader improvement. 

The underlying data suggest otherwise. 

Core inflation accelerated from 4.1% to 4.4%, indicating that price pressures were becoming more broadly distributed beyond volatile food and energy components. The breadth of monthly price movements also remained significant: only three of the thirteen major CPI divisions recorded declines, while eight increased and two remained unchanged. 

The decline in headline inflation therefore reflected the offsetting effect of a major temporary component rather than a broad reversal of inflationary pressures. Lower oil prices reduced one important source of cost pressure, but they did not eliminate the monetary and credit conditions that had already influenced other parts of the economy. 

As established in Part I, monetary expansion does not affect all prices simultaneously. Newly created purchasing power enters through specific financial channels, influencing particular borrowers, industries, and production decisions before broader consumer-price effects emerge. 

June's CPI data should therefore not be interpreted as contradicting the monetary process. They illustrate its continuing transmission. 

The BSP's monetary data reinforce this interpretation. Broad money expanded by 12.8% in May, marking the fourth consecutive month of double-digit M3 growth. (Figure 4, lowest chart) 

Such expansion does not mechanically determine a precise monthly inflation outcome; monetary transmission operates through time and through changing economic structures. However, sustained liquidity growth provides the financial conditions through which localized price pressures can become more broadly embedded. 

This distinction is essential because supply conditions and monetary conditions operate differently. 

Supply disruptions can alter relative prices. Higher oil prices increase transportation costs. Poor harvests reduce agricultural supply. Geopolitical conflicts and supply-chain disruptions affect specific markets. 

But relative-price changes alone do not create sustained economy-wide inflation. Without additional purchasing power, higher spending in one category must generally reduce spending elsewhere. A rise in one set of prices is offset by weaker demand in another. 

Generalized inflation requires a mechanism that allows nominal spending to expand across multiple sectors simultaneously. 

That mechanism is provided by monetary and credit expansion. 

The balance sheets examined in Part II explain how that purchasing power entered the economy. 

The CPI data reveal where those monetary effects are becoming visible. 

IIIA. Administrative Suppression Is Not Price Stability 

June's inflation data also illustrate a recurring feature of price management: suppressing visible price increases does not necessarily resolve the conditions producing them. 

When politically sensitive prices rise, policymakers often respond by attempting to manage the observed price outcome directly through administrative measures, subsidies, regulatory interventions, or temporary restrictions. Such measures may provide short-term relief, but they do not eliminate the underlying economic pressures affecting supply, costs, and incentives. 

Rice provides one example.

 

Figure 5 

Despite the continued implementation of the Maximum Suggested Retail Price (MSRP), import liberalization measures, 20 pesos rice rollouts and further policy interventions affecting rice markets, rice inflation remained elevated at close to 15 %in June, only marginally lower than May's 15.6 percent. (Figure 5, upper diagram) 

The persistence of high rice inflation demonstrates the limits of administrative measures as a substitute for resolving underlying supply and cost pressures. A controlled price may temporarily alter the reported price path, but it cannot by itself change the economic conditions determining production, distribution, and availability. 

The irony is, despite this, authorities still propose to extend price caps! 

Electricity provides another important illustration. 

During June, Wholesale Electricity Spot Market (WESM) prices increased by approximately 23 percent, with particularly sharp movements in the Visayas. The development attracted limited public attention despite its potential implications for future consumer prices. 

Earlier in the year, authorities temporarily suspended aspects of WESM pricing under Executive Order No. 110 before subsequently restoring market-based pricing mechanisms. The objective was understandable: electricity prices had become politically sensitive, and temporary intervention offered immediate relief. 

However, prices perform a crucial and indispensable economic function. They transmit information about scarcity, and costs necessary for economic calculation. Administrative intervention can delay that information from appearing in observed prices, but it cannot eliminate the underlying pressures that generated it. 

When market pricing resumes, adjustments may reflect not only current conditions but also costs that accumulated during the period of suppression. What appears to be a sudden price increase may therefore represent deferred price discovery rather than a newly emerging problem. 

The same principle applies beyond electricity. Temporary relief measures introduced during the earlier oil-price shock have since been reversed, restoring excise-tax collections while households continue facing elevated living costs. The sequence demonstrates a recurring policy tension: measures that to supposedly protect consumer gives way to other political priorities. 

Administrative intervention can influence the timing of price adjustments. 

It cannot permanently remove the economic forces requiring those adjustments. 

When underlying pressures are postponed rather than resolved, inflation does not disappear. Its transmission is merely delayed, redistributed, or redirected through other channels. 

IIIB. The Poor Continue Paying the Highest Inflation Tax 

Headline inflation also conceals an important distributional reality. 

Aggregate price indices describe an average household. No household is actually average. 

The BSP and the Philippine Statistics Authority recognize this distinction by publishing separate inflation measures for the Bottom 30 %of income households. These statistics often provide a clearer picture of inflation's social consequences because lower-income households devote a larger share of their budgets to essential goods. 

June's data offered little relief. 

Although the gap between Bottom-30 food inflation and headline food inflation narrowed slightly—from 8.5 percentage points in May to 7.9 percentage points in June—it remained historically elevated or significantly above the inflation spike of 2023. (Figure 4, lower graph) 

This difference matters because persistent inflation does not affect all households equally. 

Higher‑income households generally possess greater ability to adjust through changes in consumption patterns, sustained reductions in savings, or by using accumulated assets to defend against erosion of purchasing power — for example, buying USD or other inflation‑hedging instruments. 

Lower-income households have far fewer margins of adjustment. 

They continue purchasing the same essential goods—rice, food, electricity, and transportation—but those costs represent a much larger share of their available income. Inflation therefore reduces not only purchasing power but also household flexibility and resilience. 

This perspective exposes inflation’s role as inequality’s engine: a regressive tax that punishes the poor while averages mask fragility. 

This distinction is also important when interpreting broader economic classifications and averages. Improvements in aggregate indicators may reflect selective progress, but they do not necessarily capture how households experience changing prices in their daily lives. 

Statistical averages summarize outcomes. 

Ironically, the data defies the conditions that brought upon the upper middle-income country (UMIC) status upgrade. 

That asymmetry becomes even clearer when moving beyond prices and examining the labor market, where businesses must decide whether rising costs can still be absorbed or whether they must adjust employment, investment, and production decisions. 

That said, selective liquidity injections and quasi-bailout dynamics operate as an inflation tax. The redistribution occurs through the unequal transmission of newly created purchasing power: early recipients benefit before prices fully adjust, while households with the least ability to hedge against inflation absorb the greatest loss of purchasing power. Monetary accommodation therefore functions as a regressive transfer mechanism, amplifying inequality and social pressures. 

IIIC. Benchmarkism and the Illusion of Labor Absorption 

The June inflation report reveals where the transmission of monetary expansion becomes visible. The May labor report, by contrast, reveals where its longer-term consequences begin to emerge. 

Official commentary described the May labor statistics as evidence of improving "labor absorption." The phrase itself is revealing. It suggests that employment expands mechanically once workers become available, as though the economy simply absorbs labor whenever conditions permit. 

The reality is different. 

Employment is not an autonomous variable. In a market economy, labor demand is derived demand. Firms do not hire merely because workers are seeking employment. They hire because entrepreneurs, operating under uncertainty, expect that committing resources to expand the enterprise will generate future returns. 

Employment therefore represents the outcome of prior investment decisions. 

Structural capital includes not only physical assets and financial resources, but also the organizational, technological, managerial, and human capital that allow labor to become productive. Workers become more valuable when combined with the complementary capital, processes, and institutions that enable production to occur efficiently. 

A labor market can therefore improve through two very different mechanisms. 

The first involves firms utilizing existing deployed capital: filling vacancies, extending working hours, increasing production within current facilities, or replacing workers who have exited. 

The second involves entrepreneurs committing new capital to expand the productive structure itself: entering new markets, building additional facilities, acquiring new capabilities, and creating new organizational capacity. 

It is the second process that represents the creation of additional productive capacity and therefore determines the economy's longer-term ability to generate sustainable employment growth. 

Labor statistics, however, cannot fully distinguish between these outcomes. A reduction in unemployment or underemployment may indicate improved labor utilization, but it does not necessarily reveal whether firms are undertaking the deeper capital commitments required for sustained economic expansion. 

The broader investment environment provides a more cautious picture.

Figure 6

Foreign direct investment (FDI) has weakened substantially reaching a decade-low level in April. (Figure 6, topmost pane)

While the recent Iran war oil shock may have contributed to this, the broader decline in foreign exposure since 2022 suggests increasing caution among investors considering long-term commitments. 

This pattern is notable given the investment pledges announced during official engagements with geopolitical partners. Announced intentions do not automatically translate into deployed capital. Actual investment decisions ultimately depend on expected returns and hurdle rates, underwritten by institutional conditions, policy stability, and the perceived risks facing capital commitments. 

The divergence between household and business sentiment reflects a similar tension. 

BSP surveys indicate that consumers remain concerned about rising food prices, declining purchasing power, and persistent inflation pressures. Large formal enterprises, by contrast, maintain comparatively stronger expectations regarding sales and operating conditions. (Figure 6, middle left and right images) 

This divergence partly reflects differences in economic position. Large firms generally have greater access to credit, capital markets, export revenues, diversified income streams, and pricing power. Their outlook may therefore reflect stronger balance-sheet capacity or even narrative management aimed at securing financial interests, rather than broad-based improvements in the economy.

Even within business surveys, the signals are mixed. Firms may express confidence regarding near-term operations while remaining cautious about major expansion decisions. Ultimately, investment outcomes—not surveys—determine whether optimism translates into productive capacity. 

The labor statistics themselves also present a more complex picture than headline indicators suggest. 

Compared with April, labor-force participation and unemployment marginally increased 

Compared with May of the previous year, however, employment and labor-force participation remained weaker. 

More importantly, under present high inflation conditions, labor‑market softness reflects entrenched financing costs, balance‑sheet strain, policy uncertainty, volatile prices, and compressed margins. (Figure 6, lowest chart) 

Unlike the post‑pandemic reopening inflation spike, when BSP’s unprecedented injections and fiscal support temporarily fueled pent‑up demand, today’s environment discourages irreversible capital commitments. Employment gains in agriculture, construction, and accommodation may be seasonal or policy‑driven, not evidence of durable expansion. 

These conditions do not naturally encourage the irreversible commitments associated with expanding structural capital. 

The sectoral composition of employment gains reinforces this caution. 

Agriculture recorded the largest employment increase despite recurring weather disruptions and elevated input costs. Construction also expanded, although some of its momentum may reflect continued government infrastructure activity rather than broad-based private investment. Accommodation and food services improved despite tourism in recession in 2025, as well as earlier reported contractions in Baguio, Boracay, Hundred Islands and East Visayas. 

Such movements may represent temporary adjustments, seasonal effects, or sector-specific developments. 

They do not, by themselves, demonstrate a generalized expansion of productive capacity. 

The labor data is another manifestation of benchmarkism. 

Employment, unemployment, and underemployment are valuable indicators. They measure observable outcomes, but they reveal little about the entrepreneurial processes that generate those outcomes. 

They tell us how many people currently have jobs. 

They tell us far less about whether entrepreneurs are committing scarce capital to create the productive capacity required for future employment. 

That unseen process ultimately determines whether current labor conditions represent a durable expansion or merely a temporary improvement within a constrained economic structure.

IIID. Wage Mandates and the Intervention Spiral 

Against this backdrop, the Metro Manila wage board approved a historic Php85 per day increase in mandated wages, the largest adjustment in years. The measure was presented as a response to rising living costs and as protection against inflation. 

The political appeal is understandable. 

The economic challenge is that higher mandated wages do not restore lost purchasing power. They redistribute the burden of reduced real income among employers, consumers, investors, taxpayers, and workers themselves. 

The cost does not disappear because it is mandated. 

Businesses facing higher labor costs must adjust through some combination of lower margins, higher prices, reduced hiring, delayed investment, automation, or restructuring. The ability to absorb these costs differs significantly across firms. 

Large corporations with stronger balance sheets, broader revenue sources, easier access to financing, and greater pricing power may adapt more easily. 

Many MSMEs face a different reality. Operating with thinner margins, limited access to financing, and fewer opportunities to pass costs forward, smaller firms are generally less capable of absorbing mandated increases in labor costs. 

The effects of such policies are therefore not distributed evenly across the economy. Larger enterprises with stronger balance sheets, greater access to capital markets, established supply chains, and greater pricing power are better positioned to adjust. For smaller competitors and potential new entrants, however, higher compliance costs can become additional barriers to expansion. 

This creates an unintended asymmetry. Policies introduced in the name of protecting workers strengthens the position of established firms by increasing the cost of competition, while reducing opportunities for smaller enterprises to grow, train new workers, and create new employment capacity. This creates an implicit protective moat for conglomerates, raising barriers to entry and reinforcing concentration under the guise of worker protection. 

The consequences extend beyond immediate hiring decisions. Firms may respond by reducing entry-level opportunities, favoring experienced workers over new graduates, limiting employee benefits, postponing expansion, increasing automation where feasible, or remaining informal. These adjustments reduce the economy's capacity to develop skills, accumulate enterprise capital, and expand productive output. 

When such interventions occur within an environment of monetary accommodation and expanding liquidity, the adjustment process becomes even more complex. Higher business costs can contribute to higher prices, while weaker investment incentives constrain future supply growth. The result is not simply a labor-market adjustment, but a mechanism through which inflationary pressures and weaker productive capacity can reinforce one another—stagflation. 

Over time, successive interventions can generate a cumulative process in which attempts to offset earlier distortions create new distortions requiring further intervention. 

Mandated wage hikes redistribute costs but do not restore purchasing power. Larger firms adapt; MSMEs struggle. The result is an implicit moat for conglomerates, raising barriers to competition. Within monetary accommodation, higher costs feed inflation while weaker investment erodes capacity — stagflation in motion. Successive interventions spiral into quasi‑bailouts, entrenching centralization, weakening feedback, and deepening rent‑seeking fragility. 

IV. Conclusion: Inflation Before Prices 

As Ludwig von Mises observed, what is commonly called inflation today is more accurately the consequence of inflation rather than inflation itself. The persistent tendency to equate inflation with rising consumer prices shifts attention away from the monetary and financial processes that precede those price movements. 

The Philippine experience illustrates why that distinction matters. 

Balance sheets reveal where purchasing power is created. Bank lending reveals where newly created purchasing power is initially directed. Credit allocation influences investment decisions, resource allocation, relative prices, and production structures long before those adjustments become visible in consumer price statistics. 

By the time inflation appears in the Consumer Price Index, the underlying monetary process has often been unfolding for months. 

Yet the process does not end with liquidity creation. The destination of that liquidity matters. When monetary expansion increasingly operates through the financing of existing financial pressures, politically significant sectors, or heavily leveraged structures, liquidity creation can function as a form of quasi-bailout—shifting adjustment costs across balance sheets rather than allowing those pressures to be fully resolved through market processes. 

The consequence is not merely higher prices. 

It is a gradual weakening of the economy's capacity to adjust. Resources are redirected toward sustaining existing structures rather than expanding productive capacity. Price signals are delayed through administrative interventions. Labor statistics improve without necessarily reflecting stronger capital formation. Businesses face rising costs while investment incentives weaken. 

These developments represent different stages of the same underlying process. 

The BSP's balance-sheet and lending data therefore provide more than a snapshot of current financial conditions. They reveal the evolving structure through which liquidity is created, transmitted, allocated, and ultimately reflected in economic outcomes. June's inflation report, the widening divergence between headline and core inflation, the burden borne by lower-income households, the changing character of employment, and the growing reliance on successive interventions are not isolated developments. They are manifestations of a broader balance-sheet process. 

Understanding inflation therefore requires looking beyond benchmark statistics. Consumer prices summarize observable outcomes. They do not explain how those outcomes came into being. 

Following inflation means following the money. 

It means following balance sheets before price indices, credit allocation before consumer spending, and institutional incentives before policy outcomes. 

Only by understanding that sequence can we understand not only why prices rise, but also why repeated attempts to suppress adjustment can transform monetary accommodation into a self-reinforcing process of weaker investment, distorted allocation, and ultimately stagflation. 

_____

References: (last 3)

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings 

Stagflation Part 10: The Politics of Contradiction—Rate Hikes, Liquidity Addiction, and External Constraint Under Balance-Sheet Stress 

Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility