The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments’ debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing—Edward Chancellor 

In this issue

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

I. Introduction: Evading the Real Issue

II. The Fallacies Behind the CMEPA’s Defense

A. False Equivalence

B. Red Herring

C. Categorical Error

D. Begging the Question

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”)

F. Appeal to the General (Overgeneralization)

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback 

Logical fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they obscure financial repression and pave the way for systemic economic backlash. 

This is a follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

I. Introduction: Evading the Real Issue 

The Capital Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not merely because of its tax provisions but because of what it signals about the evolving relationship between the state and citizen savings. 

While defenders of CMEPA claim it merely modernizes financial taxation and expands savings options, these arguments often rest on flawed logic and misleading equivalencies that mask the deeper issues: the erosion of true savings, the rise of speculation, and creeping state control over private capital.

Besides, in classical economic thought, savings is deferred consumption—a temporal anchor against uncertainty, a moral wager on future stability. Time-bound, low-risk instruments like term deposits have long served this function. They do not aspire; they buffer. When the state flattens the tax incentives protecting this buffer, it doesn’t merely tweak an equation—it alters the meaning of saving. 

II. The Fallacies Behind the CMEPA’s Defense 

CMEPA's defenders lean on several logical fallacies to support their case: 

A. False Equivalence: By equating time-bound savings with speculative financial assets such as stocks or REITs, proponents confuse two fundamentally different financial behaviors. Savings are deferred consumption; risk assets are bets on volatility. 

B. Red Herring: Arguments pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail Treasury Bonds distract from the core concern: CMEPA disincentivizes bank-based, low-risk savings that traditionally fund long-term development. 

C. Categorical Error: To assume that financial markets can substitute for savings systems ignores the institutional role of savings in capital formation, stability, and intermediation. 

D. Begging the Question: CMEPA defenders assume what they must prove: that taxed savings instruments still count as savings (tax = savings or 1-1=2), or that savings will simply shift outside time deposits without consequence. This begs the question. 

It presumes that risk assets and government-managed schemes are natural substitutes for time deposits. It conflates taxation with neutrality, ignoring how incentives shape behavior.

In reality, aside from extraction, tax is a signal, not a passive overlay. And when the signal penalizes duration, it redefines savings itself. 

Worst, it also treats financial repression as benign without examining its structural damage to intermediation, capital formation, and systemic liquidity.

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”) 

Defenders highlight only the seen—that capital might shift to “alternative” instruments like stocks or Pag-IBIG MP2. 

What is seen:

1. Lower taxes on REITs and stocks = more investment.

2. Flat tax on deposits = not new, fairness 

But they ignore the unseen: 

1. weakening of bank intermediation via the erosion of long-term bank funding,

2. The crowding out of private credit channels, and

3. The behavioral shift toward liquidity-chasing speculation, which gives rise to

4. increased market and economic volatility 

Policy must be judged not just by its immediate effects, but by its downstream damage. This is the classic Bastiat fallacy—what is unseen—the fragility, the distortion, the systemic cost—often matters more. 

F. Appeal to the General (Overgeneralization) 

CMEPA’s defenders argue that because some financial instruments like stocks, REITs, or Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for traditional savings. 

But this overlooks key details: liquidity risk, volatility, transitional frictions or tensions, accessibility, ceilings, investor profile and behavioral inertia that constrain real-world reallocation. 

Not all instruments serve the same function—especially for households that need capital preservation over yield. 

This fallacy blurs crucial distinctions between risk assets and true savings vehicles. By appealing to broad categories, it sidesteps the very real limitations and risks of reallocating savings. In policy, the details are the difference between resilience and fragility. 

Policy design and evaluation demands specificity: Without disaggregated data on household savings patterns, bank funding structures, and instrument uptake, differentiating between resilience and fragility, the defense becomes narrative and rhetoric, not analysis. 

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities 

Since the BSP’s structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have steadily declined. 

This erosion has profound implications for the liquidity foundations of the Philippine financial system. 

Figure 1 

Notably, time deposits briefly surged during two critical junctures: first, when the BSP’s policy rates hit record lows during the pandemic, and again when aggressive rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1, topmost pane) 

Subsequent M2 growth increasingly leaned on more liquid components—such as demand deposits and currency in circulation—rather than long-term savings. 

In effect, liquidity transformation has shifted away from stable deposits toward more volatile sources: demand-driven credit expansion and the banking system’s financing of government liabilities, as evidenced by the surge in net claims on the central government (NCoCG). (Figure 1, middle graph) 

The CMEPA tax will likely accelerate this liquidity vacuum by further penalizing traditional savings vehicles. 

This structural shift presents a systemic challenge. As deposits decline, credit expansion becomes increasingly unanchored from genuine savings. In tandem with both implicit liquidity support (via bank balance sheets) and direct quantitative easing (via the BSP), this dynamic becomes inherently inflationary and destabilizing. 

The dilemma is mirrored in bank balance sheets. 

The time deposit share of total bank liabilities has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest diagram) 

This plunge coincides with a decade of financial repression: persistently low real rates, high inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA accounts. 

As traditional deposits dwindled, banks turned increasingly to borrowings to fill the liability gap. 

The share of bank borrowings from capital markets has been rising since 2015, ironically peaking just before the pandemic recession in 2019. This share temporarily declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in. 

Yet as liquidity stress intensified, bank borrowing surged anew—hitting 7.9% in March 2025—before moderating after the BSP’s second leg of RRR cuts. 

In this context, what CMEPA promotes as capital market reform in practice amounts to an escalation of the erosion of the deposit base. It trades long-term stability for short-term borrowing, redirecting household savings away from private financial intermediation and into state debt. 

The result? A more fragile banking system, less private capital formation, and greater macro-financial risk. 

Moreover, these bank borrowings now compete directly with government financing needs and private sector credit demand—exacerbating the crowding-out effect and tightening liquidity conditions for the broader economy. 

This fragility is amplified by the growing concentration of liquidity within a handful of dominant players.

Figure 2

As of May, Philippine banks controlled 82% of total financial resources or assets, with universal-commercial banks accounting for 76%. (Figure 2, topmost image) 

Meanwhile, even as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2% in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP become dependent on liquidity, but, importantly, money creation is no longer translating into real economic or savings growth. (Figure 2, middle chart) 

Taken together, as banks increasingly monopolize liquidity while time deposits diminish, the financial system becomes more fragile. It is precisely this growing instability that forced the BSP to roll out confidence-boosting measures—including the doubling of deposit insurance coverage and the second phase of the RRR cut. These are not signs of strength. They are signs of deepening systemic stress.

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap 

At first glance, gross domestic savings (GDS) might seem useful for assessing national savings conditions, but its use to account for real savings conditions is generally misleading. 

First, as a derived indicator—not a strict accounting identity—it suffers from definitional inconsistency. 

For instance, the World Bank reports it at 9.3% in 2024, while Trading Economics, citing the same source, shows 29.24%. Same source, vastly different realities. (Figure 2, lowest window) 

Second, it is calculated as: 

GDS = GDP – Total Consumption (private + public). 

But GDP itself is indifferent to distributional nuances. As we always ask here: Cui bono or Who benefits? 

Is the savings outcome driven primarily by genuine productivity gains—or by increasing dependence on leverage? What is the quality of the growth? What ratios of cost, allocation, and extraction were involved? 

Third, the GDS measure masks household savings weakness—especially during capital flight or high profit repatriation. 

Fourth, how are these "savings" reflected in the banking system? 

Even when elevated GDS suggests high aggregate capacity, the reality is that available savings for productive intermediation—such as long-term deposits and investible capital—are scarce. CMEPA threatens to worsen this distortion by tilting incentives toward consumption and speculation. 

Put differently: while 2024 GDS appears deceptively high at over 29% of GDP, net national savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank estimates. 

This reveals a deep structural fragility in the country's true capacity to accumulate capital. By penalizing savings and redirecting flows into speculative capital markets, CMEPA threatens to widen this gap and exacerbate the very vulnerabilities it claims to address.

Figure 3

Yet—and this is key—BusinessWorld recently produced a chart based on Philippine Statistics Authority (PSA) data showing the second widest gap between saving rates (apparently from the World Bank) and investment rates —which we discussed last March. (Figure 3, topmost visual) 

If savings were truly robust, why does this gap persist? What finances this chasm? 

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage 

Cherry-picking numbers to defend the law ignores that the savings-investment gap has been manifested through ‘twin deficits’—fiscal and external trade. Despite supposed normalization post-pandemic, the Philippine economy remains at pandemic-level dependency on credit. (Figure 3, middle graph) 

Here’s the key: public spending is part of those investment rates. 

Bureau of the Treasury data revealed that the 2025 first-half fiscal deficit hit a record Php 765.49 billion—even without a recession! This confirms earlier warnings, which we’ll expand on in another post. (Figure 3, lowest diagram) 

So, who finances this? Domestic banks and foreign lenders are now absorbing this growing imbalance. 

As previously noted: 

"A shrinking domestic savings pool limits capital accumulation, increases dependence on external financing, and exposes the economy to risks such as debt distress and currency fluctuations."— Prudent Investor, March 2025

Figure 4

As of May, public debt hit a record Php 16.918 trillion, with June data expected to breach Php 17 trillion —the all-time high deficit will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%? (Figure 4, upper graph) 

Meanwhile, combined with total bank credit expansion, systemic leverage reached a new record of Php 31.225 trillion, or 118% of 2024 nominal GDP. (Figure 4, lower chart) 

And that figure excludes: 

• Capital market debt issuance (corporate bonds, CMBS)
• FDI-linked intercompany loans
• Informal debt (pawnshops, personal lending, unregulated finance)

Think of the costs: this credit buildup means rising debt servicing burdens, declining real incomes, and growing risks of delinquencies and defaults. 

More importantly, in the absence of productivity-led savings growth, the Philippine economy is running on borrowed money—and borrowed time.

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2 

Defenders of CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for taxed time deposits. 

But these are neither comprehensive nor scalable: 

MP2 has annual ceilings and requires Pag-IBIG membership. 

RTBs are state-managed, episodic, and offer limited liquidity.

Figure 5 

Latest BSP data: (Figure/Table 5) 

• Total time deposits in the PH banking system: Over Php 5 trillion
• Long-term deposits (>5 years): ~Php 500–Php 700 billion
• RTB retail uptake: ~Php 175 billion
• MP2 inflows: ~Php 30–Php 50 billion/year 

Combined, RTBs + MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of tax incentives. The rest sits idle, chases risk, or exits the formal system. 

More critically, these instruments are not substitutes for a diverse, open savings ecosystem. They represent state-controlled pipelines—a form of financial repression where household capital is diverted into funding public consumption, and paid for by the diminishing purchasing power of the peso. And this is supposed to ‘encourage’ savings growth? Really?

This contradicts the narrative that these flows remain as ‘savings outside’ time deposits. On the contrary, it is a narrowing of financial autonomy. 

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den 

As previously discussed, the policy-induced gambling mentality has migrated to the equity markets. Instead of encouraging true savings, CMEPA will foster boom-bust cycles that further erode wealth and fuel capital consumption. 

This week’s coordinated pre-closing and afternoon pumps illustrate how institution-dominated markets manage the main index for optics—what we might call "benchmark-ism." (Figure 5, lower graph)

Though it escapes the Overton Window, this behavior—like CMEPA—distorts the price signal function of capital markets, leading to the misallocation of capital goods in the economy. 

By stoking gambling instincts, markets become casinos where savings and credit—someone else’s savings or bank-issued liquidity—is converted into house profits. 

When capital markets are manipulated for non-market goals, the effect is the same: momentum cloaking a wealth transfer. 

CMEPA leads savers straight into the lion’s den. 

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

In an age where reform rewards liquidity and penalizes patience, true saving becomes a philosophical—and revolutionary—act. It’s no longer just economic prudence. It’s resistance to engineered ephemerality. 

The ideology driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant. Be taxable. Be subservient to the state. 

The public must reply: Be steady. Be real. Be cautious. And above all—be sovereign. 

This is not academic critique—it’s a warning. When incentives distort prudence, the fallout is material, not theoretical. 

CMEPA does not act alone. It fuses with a wider architecture of distortion:

• BSP’s redistributionist easing cycle
• Record deficit spending
• An implicit USDPHP soft peg
• Accelerating bureaucratization and economic centralization 

Together, they form the scaffolding of financial and social maladjustment. 

And when crises surface—households hemorrhaging stability, banks scrambling for duration, systems unraveling under engineered fragility—the reckoning will be felt everywhere. 

In that moment, accountability will matter. 

We must remember: Who authored this distortion? Who rationalized it as progress? 

And we must prepare—for its backlash. 

___

References

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025, Substack

 

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

 

THE question of deficit finance is at the center of public discussion of economic matters today, as it is in any society undergoing serious price inflation, and as it should be, for there is no more basic connection in economic affairs than that linking deficit finance and inflation. Though Milton Friedman's aphorism that ''inflation is always and everywhere a monetary phenomenon'' is true (or as true as economic aphorisms get), it is equally true that sustained monetary expansions are always and everywhere a consequence of printing money to cover the difference between Government expenditures and tax revenues—Robert E. Lucas 

In this issue

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback

III. Revenue Performance: Strong Headline, Weak Underpinnings

A. May 2025 Revenue Dynamics

B. Five-Month Revenue Trends

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets

V. The Politics of Economic Forecasting and Revenue Implications

VI. Public Spending Patterns: Election Effects and Structural Trends

A. May 2025 Expenditure Analysis

B. Five-Month Spending Trends

C. Budget Execution and Future Projections

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb

A. Interest Payment Trends

B. Financing Implications

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

 

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock? 

Fiscal Theater vs. Market Reality: A Critical Look at the 2025 Budget Trajectory Using May and 5-month Performance as Blueprint 

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative 

This article is an update to our previous piece titled “Is the Philippines on the Brink of a 2025 Fiscal Shock?" 

Are Philippine authorities becoming increasingly desperate in their portrayal of economic health? Is there an escalating reliance on "benchmark-ism"—the artful embellishment of statistics and manipulation of market prices—to project an aura of ‘sound macroeconomics?’ 

Beyond the visible interventions—such as the quasi-price controls of Maximum Retail Prices (MSRPs) and the Php 20 rice initiatives, which signal low inflation—amid the emerging disconnect between market dynamics and banking conditions, does May’s fiscal deficit reflect political signaling? 

This article dissects the National Government’s (NG) fiscal performance for May 2025 and the first five months of the year, revealing structural nuances behind the headline figures and questioning the sustainability of current fiscal policies.

Figure 1

The Bureau of Treasury (BTr) reported: "The National Government’s (NG) fiscal position significantly improved in May 2025, with the budget deficit narrowing to Php 145.2 billion from Php 174.9 billion in the same month last year. This lower deficit was primarily driven by a robust 13.35% growth in revenue collections, alongside a moderation in expenditure growth to 3.81% during the national elections month. The cumulative deficit for the five-month period reached Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year (YoY), as the government accelerated investments in infrastructure and social programs to support inclusive growth. NG remains on track to meet its deficit target for the year through prudent fiscal management and efficient use of resources, in line with its Medium-Term Fiscal Program" (BTr, June 2025) [bold added] [Figure 1, upper graph] 

However, beneath the fog of political rhetoric, the election-induced public spending cap—mainly on infrastructure—appears to be the true catalyst behind May's reported budget improvement. The temporary restraint on government expenditures during the electoral period created an artificial enhancement in fiscal metrics that masks underlying structural concerns. 

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback 

Examining the January-to-May period reveals a more complex narrative. The stated deficit of "Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year" actually reflects a substantial revision in March spending that resulted in a lower reported deficit. 

March public spending was revised downward by 2.2% or Php 32.784 billion, from Php 654.984 billion to Php 622.2 billion. This revision cascaded into a 5.9% reduction in the five-month deficit, from the original Php 556.7 billion to the revised Php 523.9 billion. Authorities attributed this revision to "trust transactions." 

Despite this rollback, the current deficit represents the THIRD-highest level on record, trailing only the unprecedented Php 566.204 billion and Php 562.176 billion recorded in 2021 and 2020, respectively. [Figure 1, lower chart]

Figure 2

Those record-high deficits reflected ‘fiscal stabilization’ policies during the pandemic recession, when deficit-to-GDP ratios reached 7.6% and 8.6% amid negative GDP growth of -8.02% in 2020 (pandemic recession) and +8.13% in 2021 in nominal terms, or -9.5% and +5.7% in real GDP terms.  (Figure 2, topmost window)  

Of course, these were funded by all-time high public debt (excluding indirect liabilities incurred by private firms under PPP projects). 

Remarkably, without a recession on the horizon, the five-month deficit has already surpassed the budget gaps of the last three years (2022-2024) and appears likely to either match or even exceed the 2020-2021 levels. 

This trajectory stands in stark contrast to authorities' optimistic target of a 5.3% deficit-to-GDP for 2025—revised to 5.5% just last week. Just 5.5%! Amazing. 

With financial markets seemingly complacent—barely pricing in any surprises—would the eventual revelation that the early 2025 deficit “blowout” might mimic the fiscal health of 2020–2021 trigger a significant market shock? 

Or has the risk premium been quietly numbed by a narrative of “contained inflation” and headline-driven optimism? 

In this climate, the interplay between fiscal slippage and monetary posture warrants closer scrutiny. If macro fundamentals continue to diverge from market sentiment, will the ‘bond vigilantes’ remain silent—or are they simply biding their time? 

III. Revenue Performance: Strong Headline, Weak Underpinnings 

While the five-month headline figures for revenues and expenditures did set new nominal records, the underlying structural details will ultimately dictate the fiscal year's trajectory. 

A. May 2025 Revenue Dynamics 

Total revenues grew by 13.35% in May 2025, slightly below the 14.6% recorded in May 2024. Tax revenues, comprising 75% of total revenues, expanded by 6.25%—nearly double the 3.35% growth rate of May 2024. This improvement was driven by the Bureau of Internal Revenue's (BIR) robust 10.71% growth, while the Bureau of Customs (BoC) contracted by 6.94%, contrasting with 2024's respective growth rates of 3.35% and 4.33%. 

Non-tax revenues surged 40.9% in May 2025, though this paled compared to the 98.6% spike recorded in May 2024. 

B. Five-Month Revenue Trends 

May's revenue outperformance lifted the cumulative five-month results. From January to May 2025, total revenue grew by 5.4%, representing significant deceleration from the 16.34% surge in the corresponding 2024 period. (Figure 2, middle diagram) 

Tax revenues, accounting for 89.7% of total collections, increased by 10.5%, marginally down from 2024's 11.2%. The BIR demonstrated resilience with 13.8% growth compared to 12.8% in 2024. However, the BoC stagnated with a mere 0.22% increase, dramatically lower than the previous year's 6% growth. 

Despite May's surge, non-tax revenues contracted by 24.8% in the first five months of 2025, a sharp reversal from the 60.6% growth spike recorded last year. 

While the BIR shows resilience, the BoC and non-tax revenues lag, signaling vulnerabilities in revenue diversification. 

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets 

Authorities markedly lowered their GDP target for 2025. According to ABS-CBN News on June 26, "The Philippines has again revised its growth target for the year, citing heightened global uncertainties such as the conflict in the Middle East and the imposition of US tariffs. The Development and Budget Coordination Committee on Thursday said it was targeting an economic growth range of 5.5 to 6.5 percent. In December last year, the target for 2025 was set at 6 to 8 percent." (bold added) (Figure 2, lower image) 

The BSP's June rate cut also hinted at growth moderation. As reported by ABS-CBN News on June 19: "BSP Deputy Governor Zeno Abenoja said the central bank also eased rates due to the possible 'moderation' in economic activity." (bold added) 

The most striking revision involved reducing the upper end of the growth target from 8% to 6.5%—a substantial markdown that signals underlying economic concerns! 

V. The Politics of Economic Forecasting and Revenue Implications 

The Development Budget Coordination Committee (DBCC), as an inter-agency body, represents an inherently political institution plagued by ‘optimism bias’—the tendency to overestimate GDP growth. This bias stems from multiple sources: political pressure to maintain public confidence for approval ratings, the need to justify ambitious economic targets for budget and spending projections, and the imperative to maintain access to affordable financing through public savings. 

Authorities also embrace the Keynesian concept of ‘animal spirits,’ believing that overly optimistic predictions boost business and consumer confidence, thereby spurring increased spending to drive GDP growth. 

Likewise, by promoting investor sentiment, they hope that buoyant markets will create a ‘wealth effect’ that further bolsters spending and economic growth. Rising asset markets may translate capital gains into increased consumption, while higher collateral values encourage more debt-financed spending to energize GDP. 

However, because authorities rely on “data-dependent” approaches, they turn to economic models anchored in historical data and rigid assumptions—often constructed through ex-post analysis. 

Yet effective forecasting requires more than backward-looking templates; it demands grappling with the complexities of purposive human action, where theory operates not as a passive derivative of data, but as a deductive logical framework for validation or falsification. 

As economist Ludwig von Mises observed: 

"Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories." (Mises, 1998) (bold added) 

Because the DBCC relies on “data-dependent” econometric models that essentially project the past into the future, authorities attempt to smooth out forecasting errors through revisions. 

They often rely on ‘availability bias or heuristic’ to inject perceived relevance into their projections.  

They also embrace ‘attribution bias’—crediting positive developments as their accomplishments, while assigning blame for adverse outcomes to exogenous factors. 

Last week’s GDP downgrade exemplifies this pattern. Authorities cited the Middle East conflict and new US tariffs to justify the lower projections—an example of political messaging shaped by both availability and attribution biases. 

This GDP downgrade carries significant implications, as revenues depend on both economic conditions and collection efficiency. If authorities have already observed signs of economic “moderation” that warranted substantial downward revisions—yet continue to overstate targets—this suggests that actual GDP may fall well below projections. 

A lower GDP would likely erode public revenues, potentially setting off a vicious cycle of fiscal deterioration. 

VI. Public Spending Patterns: Election Effects and Structural Trends 

A. May 2025 Expenditure Analysis 

Public spending barely grew in May—the mid-term election period—increasing by only 0.22% compared to 22.24% in 2024. National disbursements remained virtually unchanged at 0.12% versus 22.22% in 2024. Local government unit (LGU) spending increased 14.5%, accelerating from 8.54% last year. Interest payments jumped 14.5% compared to 47.8% in 2024. 

The national government commanded the largest expenditure share at 69.9%, followed by LGUs at 16.15% and interest payments at 12.1%. 

B. Five-Month Spending Trends 

Though public spending in the first five months of 2025 reached record levels in peso terms, growth moderated to 9.7% from 10.6% in 2024. LGU spending growth of 13.2% exceeded 2024's 10.6%. Both national government and interest payments registered lower growth rates of 9.24% and 11.14% respectively, compared to 14.83% and 40% in the previous year.

Figure 3 

Despite decreased growth rates, interest payments hit record highs in peso terms, with their expenditure share reaching 14.43%—the highest level since 2010. (Figure 3, upper visual) 

C. Budget Execution and Future Projections 

The selective infrastructure ban during elections, combined with March's spending cuts, clearly reduced five-month disbursements and the fiscal deficit. Public spending in the first five months totaled Php 2.447 trillion, representing 39.16% of the annual budget. 

With seven months remaining to utilize the annual allocation of Php 6.326 trillion, government outlays must average Php 549.83 billion monthly. If the executive branch continues asserting dominance over Congress, the six-year trend of budget excess will likely extend to a seventh year in 2025. (Prudent Investor, May 2025) 

Crucially, with authorities anticipating a potential significant shortfall in GDP, the recent spending limitations due to the exercise of suffrage could translate into a substantial back-loading of the budget in June or Q3. (Figure 3, lower chart) 

That is to say, even if June 2025's deficit merely hits its four-year average of Php 200 billion, the six-month budget gap would soar to Php 723.9 billion, surpassing the 2021 record of Php 716.07 billion! 

Thus, it defies sensible logic for authorities to assert, "NG remains on track to meet its deficit target for the year through prudent fiscal management," as this would amount to a complete inversion of economic reality. 

The crucial question is, ‘how would markets react to a likely fiscal blowout?’

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb 

How will the current deficit be financed? 

A. Interest Payment Trends 

While 2025's five-month interest payment growth of 11.14% was considerably slower than 2024's 40%, nominal values reached record highs, with interest payments' share of public expenditure rising to its highest level since 2010.

Figure 4

Including amortizations, public debt servicing costs declined significantly by 42.22% compared to the previous year, which had posted a 48.5% growth spike. This wide gap primarily resulted from a 61.4% plunge in amortizations. (Figure 4, topmost graph) 

However, the five-month foreign exchange (FX) share of debt servicing accelerated dramatically from 18.94% in 2024 to 38.6% this year. (Figure 4, middle window) 

B. Financing Implications 

Several critical observations emerge from the data. 

First, authorities may currently be paying less due to scheduling reasons, 2024 prepayments, or political considerations—to avoid arousing public concern or triggering uproar over the rising national debt. 

Second, the widening deficit represents no free lunch—someone must fill the financing void. In the first five months, debt financing surged 86.24%, from Php 527.248 billion to Php 981.94 billion. (Figure 4, lowest image) 

Regardless of how authorities obscure these costs, sustained borrowing will inevitably translate into higher servicing burdens. 

As we noted last May: 

This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted: 

-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop.  

-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures.  

-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral.  

-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation  

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)

Figure 5

Third, public debt surged 10.24% YoY to hit a fresh all-time high of Php 16.95 trillion in May and will likely continue climbing through bond issuance to finance a swelling deficit! (Figure 5, topmost pane) 

The increase in May’s public debt was partly muted by a stronger peso. The BTr noted, "The decrease was due to P3.55 billion in net repayments and the strengthening of the peso, which reduced the peso value of foreign debt by P29.35 billion." 

But of course, this represents statistical "smoke and mirrors," as FX debt will ultimately be repaid in foreign currency—not pesos. In a nutshell, the strong peso disguises the actual extent of the public debt increase. 

Fourth, despite record-high government cash holdings of Php 1.181 trillion, the Bureau of the Treasury reported a cash deficit of Php 23.14 billion in May—underscoring underlying liquidity strains. 

Fifth, banks will likely remain the primary vehicle for deficit financing. While their Held-to-Maturity (HTM) assets slightly declined from a record Php 4.06 trillion in March to Php 4.036 trillion in April, this was mirrored in net claims on the central government (NCoCG), which moderated from Php 5.58 trillion in March to Php 5.5 trillion in May (+9.36% YoY). Notably, NCoCG has closely tracked the trajectory of HTM assets. (Figure 5, topmost and middle visuals) 

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes 

Beyond government debt affecting bank liquidity conditions, competition for public savings between banks and non-financial conglomerates continues to tighten financial conditions—via liquidity constraints and upward pressure on interest rates. 

The crowding-out effect from rising issuance of government, bank, and corporate debt further diverts savings toward non-productive ends: debt refinancing, politically driven consumption, and speculative “build-and-they-will-come” ventures. 

Despite this, Philippine Treasury markets and the USD-PHP exchange rate appear defiant in the face of the BSP’s easing cycle—even as the Consumer Price Index (CPI) trends lower—as previously discussed) 

Globally, rising yields amid mounting debt loads have reawakened the specter of “bond vigilantes”—their resurgence partly driven by balance sheet reductions and Quantitative Tightening. Their presence is evident in the upward drift of sovereign yields (e.g. Japan 10Y, US 10Y, Germany 10Y and UK 10Y), posing a risk that could reverberate across local markets. (Figure 5, lowest chart) 

In response, the Philippine government has redoubled efforts to lower rates through a variety of channels—ranging from quasi-price controls to market interventions to an intensified BSP easing cycle. 

Yet perhaps most telling is its increasing reliance on statistical legerdemain or "benchmark-ism"—notably, the reconstitution of the real estate index to erase prior deflationary prints, despite soaring commercial vacancy rates—a subject, of course, for another post. 

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

What authorities frame as "prudent fiscal management" increasingly looks like an exercise in political optics designed to pacify markets and voters, while deeper structural risks build beneath the surface. Headline improvements in the deficit mask the reality of slowing revenue momentum, surging financing needs, rising reliance on FX debt, and a likely surge in second-half deficit. 

As markets remain lulled by political signaling, the Philippines moves closer to a fiscal reckoning — one where statistical smoothing and policy theater will no longer suffice. 

The key question: how will markets and the public react when the full weight of these imbalances becomes undeniable? 

___

References 

Bureau of Treasury, National Government’s Budget Deficit Narrows to Php 145.2 Billion in May 2025 Amid Sustained Strong Revenue Growth June 26, 2025 https://www.treasury.gov.ph/

Ludwig von Mises, Human Action, p.348 Mises Institute, 1998, Mises.org 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, Substack May 4, 2025

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.