Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

 

The vulgar Keynesian focus on consumption unfortunately tempts politicians to approve “stimulus” measures aimed at pumping up this part of total spending…Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption—Robert Higgs 

In this issue

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations

II. The Big Consensus Miss Versus a Contrarian View of the GDP

III. On GDP: Methodological Skepticism and Political Incentives

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble!

V. Slowing Liquidity and Money Supply Trends

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On?

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle

XI. Salary Loans: A Proxy for Financial Distress?

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion 

A crucial Q1 2025 GDP forecast miss by the consensus, and why embracing mainstream ideas can be perilous for investors. 

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations 

Q1 2025 GDP should fully reflect the initial phase of the Bangko Sentral ng Pilipinas’ (BSP) easing cycle, launched in the second half of 2024 with three interest rate cuts and a reduction in the reserve requirement ratio (RRR). 

While this policy shift may be touted as stimulating credit growth and investment, its actual goal may be to inject liquidity into the system while simultaneously lowering debt servicing costs. 

The combined effects of the 2024 and 2025 easing phases are expected to influence the performance of Q2 and first-half 2025 GDP 

II. The Big Consensus Miss Versus a Contrarian View of the GDP

Figure 1

Two days before the Philippine Statistics Authority (PSA) released its Q1 2025 GDP estimates, consensus forecasts predicted a robust 5.9% growth rate. We challenged this optimism, arguing (in x.com) that it likely overestimated actual performance. (Figure 1, upper image) 

Three critical indicators provide essential clues to the economy’s trajectory: 

1. Bank Revenues Signal Weakening Demand 

First, the combined Q1 2025 gross revenues of two of the Philippines’ largest banks, BDO Unibank [PSE: BDO] and Metropolitan Bank & Trust [PSE:MBT], recorded a fourth consecutive quarterly decline since Q1 2024, with Q1 2025 marking the sharpest deceleration. 

Given that their revenues accounted for approximately 1.72% of 2024 nominal GDP (NGDP), this slowdown signals broader economic weakness. 

Despite aggressive lending, banks appear to be yielding diminishing returns. That said, while banks may be aggressively lending, they may not be "getting a bang for their buck," as an old saw goes. 

This trend underscores inefficiencies in credit allocation, potentially dampening economic activity. 

And yes, Financial GDP slowed in Q1 (Figure 1, lower window) 

2. Declining Headline CPI Reflects Softening Demand 

Headline CPI has now posted three consecutive quarters of decline. We interpret this not merely as a result of supply-side adjustments but primarily as a reflection of weakening aggregate demand—a point we have consistently emphasized. 

3. Fiscal Stimulus: Record Q1 Deficit-Financed Spending

Figure 2 

Third, public spending surged in Q1 2025, resulting in a record fiscal deficit for the period. This aggressive expenditure, designed to bolster GDP, was highlighted in last week’s analysis. (Figure 2, upper graph) 

However, this strategy carries risks, including crowding out private sector activity and exacerbating public debt. 

4. Trendlines and Economic Realities: The Shift to a Slower Growth Path 

Using the PSA’s peso-denominated figures, nominal GDP (NGDP) and real GDP (rGDP) reveal a secondary trendline that has guided economic performance since the pandemic recession. (Figure 2, lower visual) 

Seen from this perspective, this second trendline essentially extrapolates to a slowing GDP trajectory. 

With that said, unless the economy regains its primary growth path, this downward trend will persist, operating under the shadow of significant downside risks. 

We are both amused and amazed by the pervasive optimism—or mass delusion—among establishment analysts, who consistently, or rather perpetually, echo official predictions rather than scrutinizing actual data. 

This tendency, aimed at shaping the Overton Window—the range of ideas deemed acceptable in public discourse—reflects a patent disconnect from economic realities. 

III. On GDP: Methodological Skepticism and Political Incentives 

We are not staunch believers in GDP, which we believe is determined and calculated for political purposes. It relies on structural mismatches between the subjectivism of human actions and the objectivism of the empirical analysis underlying it. Consequently, its calculation is based on numerous flawed assumptions. 

In any case, although authorities can manipulate figures to promote their agenda (as neither the CPI nor GDP is subject to audit), economic reality will ultimately prevail 

Despite this, true enough, the Q1 2025 GDP growth rate of 5.4% fell significantly below consensus estimates, validating our cautious outlook. 

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble! 

The bank-finance sector’s real GDP growth slowed from 8.3% in Q1 2024 to 7.2% in Q1 2025. (Figure 1, upper chart, again) 

Despite this deceleration, its outperformance relative to other sectors boosted its GDP share to a record 11.7%, signaling the deepening "financialization" of the Philippine economy. 

Strikingly, despite this, bank GDP growth substantially slowed over the last five quarters, from Q1 2024 to Q1 2025 (13.1%, 10.2%, 8.7%, 6.5%, and 5%), affirming my analysis. 

The Raging Financial Stock Market Bubble

Figure 3 

Despite this, the PSE’s bank-dominated financial index continues to hit all-time highs (including this Friday or May 9)—more evidence of the disconnect between share prices and fundamentals or a growing sign of a stock market bubble. (Figure 3, topmost diagram) 

Instead of widespread public participation, its less apparent nature stems from rising share prices being driven mainly by the "national team" or the BSP's cartel- network of banks and financial institutions. 

Bear in mind, the free float market cap share of the top three banks has been instrumental in supporting and currently driving the PSEi 30 to its present levels. 

BDO, BPI, and MBT account for 24.2%—up from a low of 12.76% in August 2020—while including CBC, this rises to 25.9% of the PSEi 30 (as of May 9). These four listed banks rank among the top 10 by free float market cap. (Figure 3, middle chart)

The banks’ outperformance coincides with, or bluntly put, stems from, the BSP’s historic rescue efforts and massive subsidies during the pandemic, which have been carried over to this day.

The percentage share of turnover of the top five banks in the financial index has averaged 23% of the main board volume Year-to-date—indicating a heavy buildup of concentration activities or risk. 

In any case, while banks constitute 60% of the sector’s GDP, the outperformance of non-banks and insurance companies buoyed the sector’s GDP. 

V. Slowing Liquidity and Money Supply Trends 

Liquidity conditions eased further in Q1 2025, with the money supply-to-GDP ratio (M2 and M3) continuing its downward trajectory. (Figure 3, lowest image) 

This trend, which accelerated from 2013 to 2018 and spiked during the 2019–2020 pandemic recession with the BSP’s Php 2.3 trillion injection, has significantly influenced CPI through what the mainstream calls "aggregate demand." 

In the current phase of this cycle, since peaking in 2021, this key measure of credit-driven demand has slowed, contributing significantly to the recent CPI slowdown.

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition 

The third indicator reinforcing our analysis is public spending.

Figure 4

Q1 2025 expenditures surged by 22.43%, outpacing revenue growth and resulting in a record Q1 fiscal deficit of Php 478 billion. 

This nominal spending boom translated into a significant GDP contribution, with government spending GDP spiking by 18.7%—the highest since Q2 2020—excluding government construction spending! (Figure 4, topmost graph) 

However, consumer spending GDP, while rising from 4.7% in Q4 2024 to 5.3% in Q1 2025, saw its share of national GDP decline from 74.7% to 74.3%. (Figure 4, second to the highest window) 

In contrast, government GDP’s share rose from 12.3% to 15.9%, reflecting a structural shift. 

These numbers reflect an ongoing trend: they reveal the peak of consumer spending at 80.6% in Q3 2002, which steadily declined to the 2020 range (67–75%), while conversely, since its 8% low in Q4 2005, government GDP has nearly doubled, with its trend accelerating since 2020. 

All these are evidence that there is no such thing as a free lunch, as whatever the government takes from the private sector for its expenditures or consumption comes at the latter’s expense—the crowding-out syndrome in motion. 

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt 

This shift comes at a cost—record Q1 2025 public debt. Public debt soared from Php 16.05 trillion in Q4 2024 to a historic Php 16.68 trillion, a net increase of Php 633 billion, financing the period’s Php 478.8 billion fiscal deficit! 

This quarterly debt increase, the highest since Q3 2022, reflects an upward trend! (Figure 4, second to the lowest chart) 

Furthermore, a weaker US dollar in March tempered debt growth, reducing the foreign exchange (FX) debt share to 31.8%. However, the FX debt share has been rising since its March 2021 trough. (Figure 4, lowest graph) 

Consequently, Q1 2025’s deficit-to-GDP ratio surged to 7.27%, far exceeding the government’s 5.3% target! 

Looking at all this, both macro (CPI, deficit spending) and micro (bank revenues, bank GDP) factors have converged to highlight a significant economic slowdown, yet despite the establishment’s cheerleading, the diminishing returns of artificial growth driven by implicit backstops—BSP easing and fiscal stimulus—will gradually take their toll and heighten risks. 

As it stands, this marks another round for this contrarian analyst. 

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On? 

Let us now examine the other critical forces shaping the statistical economy—GDP.

Figure 5 

Not one among the establishment punditry seems to ask: While the Philippine economy nears full employment, instead of a boost, GDP has been declining—what the heck is going on? 

Employment reached 96.1% in March 2025, averaging 96.02% in Q1 2025 and 95.9% over the 25 months since January 2023, according to Philippine Statistics Authority (PSA) data. (Figure 5, topmost visual) 

However, this near-full employment masks structural weaknesses. 

Consumer per capita GDP, which peaked at 8.98% year-on-year in Q2 2021, has decelerated, with Q1 2025’s 4.4% growth—up slightly from 3.84% in Q4 2024—marking the second-slowest pace since the pandemic. 

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

While the workforce population continues to grow, the labor force participation rate has formed a "rounding top" pattern, indicating a gradual peak and a potential decline. In simpler terms, more people are being counted outside the labor force. (Figure 5, middle diagram) 

Why is this happening? 

A recent Congressional report on functional illiteracy in the education sector provides a critical clue. 

The Manila Times, May 7, 2025: "BETWEEN 2019 and 2024, 18 million students graduated from the country's basic education system despite being functionally illiterate. This was found by the Senate Committee on Basic Education during its April 30, 2025 hearing on the initial results of the 2024 Functional Literacy, Education, and Mass Media Survey (Flemms)." 

Assuming 16.2 million of these graduates remain in the labor force or are employed, while 10% (1.8 million) have joined the "not in the labor force" category (due to migration, mortality, or disengagement), approximately 32% of the labor force or 33% of the employed population is engaged in low-skilled work 

That’s right. Despite near full-employment data from the PSA, a large segment of the workforce is likely in low-skill, low-wage jobs, possibly concentrated in MSMEs or previously informal sectors, often earning at or below the minimum wage. 

This dovetails with Social Weather Stations (SWS) sentiment surveys, which continue to show elevated self-rated poverty (April 2025) and milestone hunger rates in Q1 2025.

In a nutshell, the most vulnerable population segments—those in low-wage, low-skilled jobs—are also the most exposed to inflation. 

These dynamics explain why poverty perceptions remain high despite supposedly strong employment numbers. 

The shrinking labor force could also be a symptom of “grade inflation,” producing a flood of graduates ill-equipped for skilled work. 

A closer look at PSA employment classifications reveals more. From January 2023 to March 2025, full-time employment averaged 67.3%, while part-time work averaged 31.9%. 

This implies a substantial portion of the workforce is underemployed or working in precarious conditions. The near-full employment figures may therefore overstate the true health of the labor market. 

In effect, the PSA’s employment data provides a façade—masking the fragility of both the labor market and broader economy. 

This explains the sluggish per capita consumption and, by extension, the national GDP. 

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle 

Following the BSP’s historic rescue of the banking system during the pandemic, money supply metrics—particularly M1—have closely tracked GDP trends. (Figure 5, lowest chart) 

GDP peaked in Q1 2021, following the M1-to-GDP spike from Q3 2019 to Q3 2023. This spike reflected the pre-pandemic bank credit expansion, intensified by the BSP’s Php 2.3 trillion liquidity injection and other pandemic-related rescue measures. 

Since then, both GDP and M1 have slowed in tandem, though M1 has decelerated at a faster rate. 

This matters, because M1—comprising cash in circulation and demand deposits—underpins the transactions that generate GDP. 

Despite the BSP’s initial easing cycle in 2H 2024, liquidity growth continues to decelerate, even as Universal-Commercial bank credit expansion reaches record highs in peso terms (Q1, 2025) 

The lack of liquidity response to the first easing cycle prompted the BSP to implement a second phase: a deeper RRR cut, the doubling of deposit insurance coverage, and a fourth policy rate cut in April. 

However, monetary policy can only do so much in the face of structural issues. 

XI. Salary Loans: A Proxy for Financial Distress?

Figure 6

Wage earners are increasingly relying on salary loans to bridge the gap to offset reduced purchasing power 

While total salary loans (in pesos) have reached all-time highs, the growth rate of these loans has been slowing since Q1 2022—(strikingly) mirroring the trend in headline CPI. (Figure 6, topmost chart) 

However, slowing growth raises questions: Has the banking system reached peak salary loans? 

Has the pool of eligible borrowers maxed out? Are employees hitting credit limits for salary loans? Or are rising non-performing loans (NPLs) forcing lenders to tighten? (Figure 6, middle graph) 

Either way, the data signals distress among middle-income and lower-income workers, who are increasingly stretched and vulnerable.         

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

Headline CPI fell to just 1.4% in April (for 2Q GDP)—driven mainly by sharp food price declines. 

Yet little is said about the regulatory basis for this fall. Both rice and pork prices are subject to quasi-price controls via Maximum Suggested Retail Prices (MSRPs). And even here, compliance—particularly for pork—has been reportedly low. (Figure 6, lowest image)

Figure 7

Core CPI stabilized at 2.2% in April 2025, outperforming headline CPI since the MRSP. This reinforces the headline CPI’s decline due to regulatory maneuvers. The core index’s downtrend since Q2 2023 signals persistent demand weakness. 

However, rising month-on-month (MoM) rates suggest a potential bottom. This pattern mirrors previous episodes (2015, 2019), where food prices fell below Core CPI, acting as a staging point for the next inflation cycle. (Figure 7, topmost and middle charts) 

Regulatory and statistical distortions raise doubts about whether CPI distortions accurately reflect real market conditions. 

Another revealing metric is the spread between the national CPI and the Bottom 30% CPI, where food deflation for the Bottom 30% in April drove the spread sharply negative—reaching its lowest level since 2022—yet, while these numbers suggest that falling food prices for the poor should reduce hunger, the latest SWS survey indicates persistently high hunger rates. (Figure 7, lowest graph) 

Once again, the statistical data points diverge from lived experience. 

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

The government’s CPI reveals numerous distortions, clearly being manipulated downward through regulation and statistical adjustments "benchmark-ism" to justify the BSP’s continued easing cycle, aimed at addressing debt and liquidity dynamics, as well as boosting GDP—which the establishment promotes as a stimulus. 

Yet behind the curated optimism—such as "upper-middle-income status"—lies a more disturbing truth: government statistics increasingly defy both economic logic and market signals. 

Market prices—USD Philippine peso exchange rate and Philippine Treasury yields—offer little support for these narratives. 

And yet, the Overton Window shaped by official optimism persists. 

Analysts, pundits, and policymakers alike remain obsessed with the hope it offers—ignoring hard realities staring them in the face. 

Until these contradictions are resolved, the statistical economy and the real economy will continue to drift further apart. 

Or, confronting these realities is essential to understanding the Philippine economy’s true trajectory.

1H PSEi 30 Debt Surges to Fresh Record! San Miguel’s Debt Swells to Php 1.123 T-R-I-L-L-I-O-N! Increasing Poverty Rates versus the GDP!

 

Broadly speaking, a crisis comes in two forms. There is the internal crisis driven by irreconcilable contradictions. Then there is the external crisis that is driven by some unusual occurrence like a natural disaster. The latter tests mostly the ability of the system to weather the storm and recover. The former tests the ability of the system to radically alter itself in order to address the contradiction. This is the most dangerous crisis and the one that few systems survive—Zman Blog 

 

In this issue 

 

1H PSEi 30 Debt Surges to Fresh Record! San Miguel’s Debt Swells to Php 1.123 T-R-I-L-L-I-O-N! Increasing Poverty Rates versus the GDP! 

I. Blatant Divergence: Increasing Poverty Rates versus the GDP 

II. Unprecedented 1H 2022 PSEi Debt Growth Eclipsed Net Income Growth! San Miguel Debt Stormed to Php 1.123 T-R-I-L-L-I-O-N! 

III. Why the Panic Borrowing of the PSEi 30’s Non-Financials? 

IV. Was the BSP’s Panicked Rate Hikes Part of Long-Term Design or an Ad Hoc Response to the Marketplace? 

V. Failing Conventionally: The Consensus Echo Chamber Badly Misread the CPI and the BSP 

VI. More Closures of Private Schools: Increasing Centralization (and Cartelization) of the Industry Paves Way for Broader Socialism 

 

1H PSEi 30 Debt Surges to Fresh Record! San Miguel’s Debt Swells to Php 1.123 T-R-I-L-L-I-O-N! Increasing Poverty Rates versus the GDP! 

I. Blatant Divergence: Increasing Poverty Rates versus the GDP 

 

Authorities, supported by consensus, always assure us that the economy will fully recover in 2022.   

 

But then, why the surge in poverty incidences? 

 

Businessworld, August 16: AROUND 2.3 million Filipinos have been plunged into poverty between 2018 and 2021, as the coronavirus pandemic left lasting scars on the Philippine economy, according to the Philippine Statistics Authority (PSA). Preliminary results of the 2021 Official Poverty Statistics estimated poverty incidence among individuals — the proportion of Filipinos whose incomes fell below the per capita poverty threshold from the total population — rose to 18.1%, from the 16.7% recorded in 2018. However, the figure fell short of the government’s goal to bring down poverty incidence to 15.5-17.5% in 2021. The PSA said the number of Filipinos living in poverty rose by 2.322 million to 19.992 million in 2021, from 17.670 million in 2018. Socioeconomic Planning Secretary Arsenio M. Balisacan attributed the rise in poverty incidence to the strict lockdowns implemented to contain the spread of the coronavirus disease 2019 (COVID-19). “The effects of the COVID-19 pandemic, including income and employment losses, caused the poverty incidence to rise. Restrictions on mobility and low earning capacity of poor households due to limited access to regular and productive jobs made the lives of Filipinos difficult,” Mr. Balisacan said at a press briefing on Monday…For a family of five, they would need around P12,030 a month from P10,756 per month in 2018. 

 

The GDP posted annual growth of 6.3% in 2018 and 6.1% in 2019.  But it shrunk by 9.6% in 2020 during the pandemic and bounced by 5.6% in 2021.  Or, the compounded average of the real GDP in the last four years was 1.9%. 

 

Some points to consider: 

 

First, authorities confirmed the surveys of the private sector partially. (The SSS on self-rated poverty and hunger).   

  

Next, interpreted from the political angle, the tendency might be to understate these numbers.   

 

The authorities blamed the pandemic for the increase in poverty incidences than their policies. A broadening of such numbers magnifies their culpability.  

 

Third, there is the question of the threshold level of poverty.  

 

How do the authorities know the magic levels that distinguish poverty from non-poverty? 

 

CNN Philippines, August 19: The Philippine Statistics Authority's (PSA) food poverty threshold of ₱8,379 per month does not evaluate a family's comfort in living within this budget, the National Economic and Development Authority (NEDA) said Friday…. We don't make judgement as to whether their lives are already comfortable. According to our nutritionists, this is the amount you need so that you are able to meet the basic requirements. There were around 1.04 million food-poor families last year — up from 840,000 in 2018 where the threshold was at ₱7,553. Batangas Rep. Ralph Recto recently criticized the 2021 food poverty threshold, noting it implies a five-member household only needs ₱279 per day for three meals. Divide this and you get ₱93 per meal for five individuals, he said. "Even if that amount would be adjusted for inflation, in this era of ₱400-a-kilo onions, I don't think that ₱93 would be enough for one family super tipid meal. Is it possible then that real hunger and poverty rates were higher than what were officially captured?" said Recto, a former NEDA chief. 

 

Yet, the higher the income numbers required, the greater the number of people in the ranks of poverty.  

 

Figure 1 

 

Fourth, what happened to the alleged record FDI flows reported by the BSP in 2021? Why has this not diffused into jobs, wages, and income? Was it because these effluxes were mostly about debt than actual investments? How accurate were these numbers? (Figure 1, topmost window) 

 

Fifth, what happened to the supposed recovery in the labor markets?  

 

Though the unemployment rate spiked to 17.6%, or by 7.228 million in April 2020, it recovered materially by the end of 2021. (Figure 1, middle pane) 

 

The number of unemployed was about 1.069 million higher at the end of 2021 from Q3 2018. Does this mean that the net increase in poverty rates of 1.253 million people accounted for the ramifications of surging inflation and the complications of malinvestments? The report cited an increase of 2.322 million in poverty incidence. 

 

Sixth, this divergence exposes the critical flaws of statistics. Statistics barely capture actual human conditions.  

 

Yet, there is a qualitative spectrum in economic activities than just measuring spending activities quantitatively. 

 

As Dr. John P Hussman observed, "When you net out all the assets and liabilities in the economy, the only thing left - the true basis of a society's net worth - is the stock of productive investment, education, and resources it has accumulated to provide for its people." 

 

II. Unprecedented 1H 2022 PSEi Debt Growth Eclipsed Net Income Growth! San Miguel Debt Stormed to Php 1.123 T-R-I-L-L-I-O-N! 

 

The public appears hardwired to interpret as "growth" any projections/presentations of an increase in financial or economic numbers by the establishment consensus.  

  

People hardly see or refuse to face the reality of the interconnection of economic and financial activities. They would instead look for heuristics (mental shortcuts) on such aspects and rely on mainstream experts to confirm their priors (confirmation bias).  

  

For instance, people marvel at the GDP, hardly noticing that it is just a statistic estimating the economic activities that are vulnerable to tweaking for political purposes.  And why should public spending be considered growth when taxes/transfers finance it? 

 

Last week, we explained that the 2Q 2022 GDP represented nothing more than an increase based on the low-base effect, a muted CPI, and an election-public spending spree by flooding cash into the economy. So, the GDP reflects liquidity growth bankrolled from public debt and bank-credit expansion. (Prudent Investor, August 2022) 

 

And for the same tendencies, the public has been programmed to ignore or discount the various risk factors, such as credit, inflation, interest rate, currency, and others, from the "selective" presentation of "growth" numbers.  

  

For example, there is hardly any discussion that a debt-propelled economy is not only unbalanced but is ultimately unsustainable. The discourse instead focuses on selective angles such as public debt to GDP, assuming its role as a stand-alone factor in the economy. 

 

And it is not just the surface numbers but the quality of economic and financial activities that matters.  

  

As this outlook shows, the 2Q and 1H financial performance of the PSEi 30 firms resonate with the GDP. 

 

It reflects on inflationary spending binges by political authorities, which partly involves the PSEi 30 firms, the resultant intensive price and economic distortions, and its variable risks. 

 

Led by San Miguel Corporation, 1H 2022 non-financial debt soared by an unprecedented Php 608.8 billion to a record Php 5.333 trillion! (Figure 1, lowest window) 

 

 

Table 2 

 

This massive debt growth represented 6.4x the net income of the PSEi 30 of Php 95.293 billion and 89% of the Php 678.08 billion revenue growth over the same period! (Figure 3, highest pane) 

 

Incredible! (More on this below) 

 

By sector, the holding firms and services generated the most debt in peso. (Table 2) 

 

The holding firms, mining, and services led the net income growth measured in peso.  

 

In the meantime, the holding firms and industrials spearheaded growth in revenues also in peso.  

 

2Q revenues and net income contributions represented 62.98% and 71.81% share of the 1H. 

 

On a company basis, San Miguel, SM, SMPH, and Ayala Corp added the most debt in pesos in the 1H.  

 

San Miguel's debt has reached a stunning Php 1.123 trillion, accounting for about 4.2% of the Philippine financial resources as of June! 

 

1H Non-financial debt accounted for 19.9% of the Philippine financial resources as of June! 

 

Sustainable risk, eh? 

 

San Miguel also led the revenue aspect, accounting for 44% of the PSEi 30 growth.  Petron, an SMC subsidiary, represented a massive 56% share of SMC's revenues. 

 

In the meantime, aside from the Php 21.5 billion net income growth of SM, mining firm SCC posted the second largest with Php 19.5 billion.  

 

While PSEi 30 firms reported substantial revenue and net income "growth," much of these were about the distortions from rising prices. 

 

In reality, net income growth signified the low base effect. Net income growth in pesos was lower this year than in the same period in 2021. (Figure 3 second to the lowest window) 

 

Revenue growth soared alright, but this was principally about inflation than about an economic boom. (Figure 3, second to the highest pane) 

 

As an aside, PSEi 30 figures represented members during earlier periods of 2021 and below and are unadjusted for audited figures. 

 

III. Why the Panic Borrowing of the PSEi 30’s Non-Financials? 

 

Here is the thing.  

 

Figure 3 

WHY were companies of the elites aggressively borrowing from the public in the face of rising rates? (Figure 3, lowest pane) 

  

The Non-financial PSEi 30 firms continue to compete with the public sector and banks for access to scarce savings. Such competition contributes to the pressure on interest rates. 

  

Yet such borrowing spree supplemented election and public spending activities that boosted demand, contributing to 2Q and 1H "growth." 

  

Were PSE companies borrowing to front-run the rate hikes of the BSP? Why? 

 

Or were these about fund-raising in the face of monetary tightening? 

 

Current events reveal manifestations of the economy’s accelerating transition toward Hyman Minsky's "Ponzi finance." 

 

Last week, heavily indebted Globe Telecoms joined the race of the elite firms to raise cash by selling assets.  It sold 5,709 cell towers for Php 71 billion.  

 

Again, rising prices, which the public misinterprets as "growth," should result in massive inventory gluts and reduced demand. Possibly compounding this pressure are the scale and swiftness of marketplace adjustments. 

  

The debt-financed clustering of entrepreneurial errors, which represents economic misallocation, should soon transform into an economic bust. 

 

The BSP raised rates by another 50 bps, which took effect this Friday. Official rates rose by 175 bps in the last three months, its most aggressive stance in decades! 

 

Proof? 

Inquirer, August 20: Borrowers of money from banks, be they individuals or corporations, are now feeling the impact of higher interest rates as a result of recent increases in the Bangko Sentral ng Pilipinas’ (BSP) benchmark policy rate. Since May, the Monetary Board has raised the interest rate on money that the BSP borrows overnight from banks by a total of 1.75 percentage points from an all-time low of 2 percent to 3.75 percent….However, the number of firms that will add to the number of suffering borrowers is very small. Medalla said that in the BSP’s sample of over 200 companies, only six firms would go from “yellow to red” alert. 

 

Firms are already reportedly bellyaching with rates even at the 3.25% level!  

  

Before the pandemic, the ON RRP of the BSP at 3% represented the previous record low!  

  

Friday’s 50 bps hike, which lifts the official policy rates to 3.75%, remain 100 bps away from the 2018 pinnacle of 4.75%! 

 

The point is, for central banks, it is easier to chop rates than to raise them. 

 

Yet the degree of financial leverage today eclipses that of 2018.  

 

The total public and bank credit portfolio (system credit) signified 60.6% higher in June 2022 compared with the end of 2018! 

  

When the BSP rates hit 4.75% in 2018, the late BSP Governor Nestor Espenilla Jr. sounded this alarm, remember? 

 

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner. (BSP, 2018) 

 

Or the higher the leverage, the greater its sensitivity to rising rates (duration risk). 

 

IV. Was the BSP’s Panicked Rate Hikes Part of Long-Term Design or an Ad Hoc Response to the Marketplace? 

 

Yet the 64 trillion peso question is: how did we get here? 

  

Have the "panicked rate hikes" been part of the BSP's program?  

 

We get some clues from their statements excerpted by the news. (bold highlights added)

 

Inquirer.net, November 4, 2021: There is scant evidence that rising prices currently hammering the Philippine economy is causing a chain reaction of inflation to warrant raising interest rates, the head of the Philippine central bank said. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the key to reining in inflation remained to be “non monetary government measures to augment the domestic supply of key food items.” “The domestic prices of key agricultural commodities such as fruits, fish, and pork as recorded in the consumer price index data have declined in recent months,” he said at an online briefing. “With continued implementation of non-monetary supply-side measures, the BSP expects ongoing price pressures to dissipate further in the coming months.” The BSP chief—who has, in recent months, been resisting calls for more aggressive action against “supply side inflation: — said the recent price increases have been traced mainly to higher prices of a limited number of items owing to pressures that are “transitory” in nature.  

 

Businessworld, February 21, 2022: THE BANGKO SENTRAL ng Pilipinas (BSP) may start normalizing policy rates towards the second half of this year as it expects the economy’s output gap to close, a central bank official said.  “Our estimate is that the output gap could close in the second half of this year, and then it will turn positive thereafter,” Deputy Governor Francisco G. Dakila, Jr. said at a Thursday briefing. The central bank raised its average inflation forecast for 2022 to 3.7% from 3.4% previously. It also increased the 2023 inflation estimate to 3.3% from 3.2%. 

 

Inquirer.net, March 12, 2022: The Bangko Sentral ng Pilipinas (BSP) intends to keep key rates low even as it expressed concern that the ripple effects of the conflict between Russia and Ukraine would reach the Philippines’ financial system. The Monetary Board is up for a policy meeting on March 24, when it will review the latest global and local developments and decide whether to keep the BSP’s key policy rate —its overnight borrowing rate —at a record low of 2 percent. 

 

Businessworld, March 17, 2022: THE PHILIPPINE central bank will remain patient and stick to its plan to raise its key policy rate in the second half of the year, despite heightened uncertainty caused by the war in Ukraine, its governor said. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they are also factoring in the policy tightening of the US Federal Reserve. The US Federal Reserve is widely expected to raise interest rates by at least 25 basis points amid surging prices later on Wednesday. 

 

Inquirer.net, March 18, 2022: The Bangko Sentral ng Pilipinas (BSP) does not have to raise its policy rates just because the US Federal Reserve did, as such decisions will depend on the domestic situation, BSP Governor Benjamin Diokno reiterated on Thursday. Diokno was reacting to a question about whether the BSP will follow the US Fed, which in effort to slow down inflation raised the benchmark federal fund rate by 25 basis points to 0.5 percent  “We do not necessarily have to move in pace with the monetary policy adjustments of the US Fed,” the BSP chief said. 

 

From the end of 2021 to the 1Q 2022, the BSP has adamantly resisted pressures from some sectors to raise policy rates. Monetary authorities instead blamed externally driven supply factors for the CPI.  

 

Yet, despite data and the trend, they held dogmatically to the conviction that pressures CPI were "transitory!"  

 

Amazingly, NONE of their projections occurred!  

 

Yet, ironically, everyone seems to believe them. 

  

Even when authorities controlled the publication of the CPI, the unparalleled rate hikes exposed that the markets pushed the BSP to keep moving their goal posts! 

  

Such dramatic moves exposed the "knowledge problem" and principal agency problems that plagued the BSP. 

 

Except to see it from an econometric perspective, the BSP had NO idea of the actual conditions or the mechanisms of the real economy.  

 

In essence, the BSP improvised its policies according to how the economy and markets evolved. But the way media and experts described reality flowed backward: The BSP is in control. 

 

By shifting the blame onto supply, the BSP insisted that low rates were necessary to finance demand, therefore, "growth." 

 

In reality, such pedantry represented the policy thrust to protect "borrowers," who provided authorities cheap funding for political boondoggles that clouded authorities’ judgments too.  

 

The government, the banks, and big league politically connected groups were the principal beneficiaries of the BSP policies at the expense of the ordinary savers. Monetary authorities, thus, remained stuck with the lockstep espousal of their "trickle-down" theory. 

 

If the BSP didn't see this coming and developments in the marketplace compelled a U-turn in their policies, how would they know of the context (scale, breadth, and timeframe) of the complex repercussions (first to the nth order and overlapping feedback loops) of their ad hoc policies? 

 

The PSEi 30 2Q/1H data reveals the escalating embedded fragilities of the financial and economic system. 

V. Failing Conventionally: The Consensus Echo Chamber Badly Misread the CPI and the BSP 

 

And how did the consensus fare with their projections/forecasts? 

 

Based on news excerpts from the end of 2021 to the 1Q 2022: 

 

Businessworld, November 23, 2021: The Bangko Sentral ng Pilipinas (BSP) is expected to increase interest rates by a total of 75 basis points (bps) next year amid the economy’s gradual recovery, Fitch Solutions Country Risk & Industry Research said. 

 

Inquirer.net December 08, 2021: Nicholas Mapa, ING’s senior economist in the Philippines, believes that the policy rate will change earlier, possibly during the second quarter next year. “We expect the Philippines to post robust growth numbers over the next two quarters, which may be enough to convince [BSP] Governor [Benjamin] Diokno, to finally decide to adjust his current accommodative stance,” Mapa said. 

 

Inquirer.net, December 20, 2021: The Bangko Sentral ng Pilipinas (BSP) is expected to raise the policy rate to 2.75 percent by the end of 2022—only after getting a clearer picture of how the economy would fare amid the ever-changing makeup of the virus causing COVID-19...Fitch does not expect BSP to aggressively shift from such stance, as the regulator might wait for a more sustained recovery in the economy and credit growth as well as reduced uncertainty from COVID-19 before beginning its hiking cycle. “We expect the economy’s recovery and growing market investor pressures for monetary tightening to prompt the BSP to begin its hiking cycle, with a gradual hiking cycle through 2022 … taking it to 2.75 percent by year-end,” it added. 

 

Inquirer.net, March 7, 2022: A combination of higher global inflation seen spilling over locally through expensive oil plus the US Federal Reserve’s forthcoming rate hikes may force the Bangko Sentral ng Pilipinas (BSP) to aggressively jack up key interest rates this year. “We expect headline inflation to rise, exceeding the BSP’s inflation target band of 2 to 4 percent by the second quarter, driven by a higher energy contribution (fuel and utilities), as well as higher core inflation as the economy reopens. We expect the BSP to start tightening monetary policy in the second half of the year, with a 25-basis point (bp) hike each in the third and fourth quarters of 2022,” Goldman Sachs Economics Research said in a March 4 report. Singapore-based United Overseas Bank (UOB), meanwhile, was sticking with its forecast of a total of 75 bps of BSP rate hikes this year, from the current record-low 2 percent policy rate…On the flip side, both UK-based think tanks Capital Economics and Pantheon Macroeconomics last week stood pat on their similar forecasts that the BSP will refrain from any rate hike in 2022. 

 

CNN Philippines, February 18, 2022: With the Bangko Sentral ng Pilipinas keeping interest rates steady anew on Thursday, how long until they start increasing them again? It depends on who you ask….“The obvious question now is 'when'and our answer still is 'not this year' despite the Bank's surprisingly more hawkish tone," said Pantheon Macroeconomics emerging Asia economist Miguel Chanco. … Capital Economics emerging Asia economist Alex Holmes also sees rates staying steady throughout the year.  “The central bank thinks the level of GDP will only reach its pre-crisis level in the third quarter of this year. Given this, we think the central bank will want to keep policy supportive,” said Holmes, adding that falling inflation allows the BSP room to maintain low rates. For ING senior economist Nicholas Mapa, however, Diokno’s first mention ever of his exit strategy means the beginning of normalization already looms. “We believe that the trigger point for a potential rate reversal would have to be linked to a solid economic recovery coupled with depreciation pressure on the peso," said Mapa…ANZ Research also foresees a rate hike by the fourth quarter of 2022, citing the “moderately more conservative” tone in BSP's recent remarks. “Although it has not provided a definite timeline for the commencement of policy normalisation, it did mention that preparations are already underway and measures can be implemented if the situation warrants so,” said ANZ Research economist Debalika Sarkar and chief Southeast Asia and India economist Sanjay Mathur. RCBC chief economist Michael Ricafort also said the policy rates will likely be maintained “in the foreseeable future or for as long as necessary,” but also flagged possible hikes once the U.S. Federal Reserve begins raising rates possibly in the latter part of the year. “Any Fed rate hike/s would also be followed by many other central banks around the world, including locally, to partly maintain healthy interest rate differentials, while also better managing both inflation and inflation expectations at more sustainable levels from relatively elevated levels,” said Ricafort. 

 

Inquirer.net March 21, 2022:  In a report, Pantheon Macroeconomics senior Asia economist Miguel Chanco said that while the Monetary Board will likely maintain the policy rate at the current record-low 2 percent, the BSP’s average 2022 inflation forecast of 3.7 percent at a global oil price assumption of $83 per barrel was already passé. The Russia-Ukraine war sent fuel costs skyrocketing above $100 a barrel. By this time, Chanco said “the energy market has calmed down to the extent that the likely pop in transport inflation in the short run should be modest, with disinflation still likely to take hold after.”  Chanco said the UK-based think tank “still doubts that the [BSP] will start to normalize” or hike rates in 2022 “as the economy remains far away from closing its COVID-19 output gap.” Pantheon Macroeconomics’ estimates showed that real gross domestic product (GDP) remained 15-percent below its pre-pandemic level…. Moody’s Analytics expects rate hikes beginning the third quarter of this year given still fragile economic recovery. “Movement restrictions to slow the spread of the Omicron variant of COVID-19 have hurt domestic demand in the opening months of 2022,” Moody’s Analytics noted… Last week, other think tanks and financial institutions like Capital Economics, Goldman Sachs Economics Research, HSBC Global Research, and Security Bank forecast the BSP to keep key rates unchanged, at least during the first half of 2022. 

 

Premised on luck, except for one, all the cited experts were echo chambers of the BSP of varying degrees. As such, the consensus badly misread the CPI and the BSP policies.  

Amazing. 

 

As John Maynard Keynes rightly observed, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." 

 

Why should they be right going forward? Has their economic reasoning changed? On what grounds? 

 

The takeaway: Everyone saying the baloney barely changes reality. Or, reality is not an option. 

 

VI. More Closures of Private Schools: Increasing Centralization (and Cartelization) of the Industry Paves Way for Broader Socialism 

 

Explaining the closure of Kalayaan College as a sign of centralization, we wrote: (Prudent Investor July 2022) 

 

The school’s experience reveals the industry’s trend toward centralization and monopolization. 

  

Hurt by low investments, joblessness, forced shutdown due to the pandemic, and reduced purchasing power, the middle-class demand for private education has diminished. 

 

In turn, schools catering to this sector may be shrinking.  

 

In its place, public schooling will rise, adding to the fiscal deficits financed by debt or inflation, or both. 

 

And so, with public schools expanding to substitute for the shriveling number of private-sector schools, the education sector shifts towards increased centralization. 

   

But inflation favors some groups at the expense of the citizenry.  

 

So families that benefit from BSP policies and the regulatory, tax, and welfare regime, coming from political institutions and well-connected elite private firms, are likely to enroll in schools of the wealthy.  

 

Extending the logic above, while middle sector schools shrink, schools of the elites prosper. That should represent policy-induced monopolization. 

 

Recent school closures reinforce the trends toward political centralization of the educational industry. 

 

CNN Philippines, August 15, 2022:  Colegio De San Lorenzo, a private school in Quezon City founded in 1987, announced it will permanently stop its operations after more than 30 years. 

 

Inquirer.net, August 16, 2022: The free learning management system (LMS) Edmodo announced on Tuesday that it is shutting down operations because it can’t keep its services free of charge while maintaining its quality. 

 

But here’s the zinger. 

 

Inquirer.net, August 19, 2020: Colegio de San Lorenzo was not the first school to close its door after the coronavirus pandemic, as the Department of Education (DepEd) listed 425 schools that have closed since 2020. DepEd spokesperson Michael Wesley Poa said that 20,838 students had been affected by such school closures, while around 10,000 transferred to public schools. “Based on our records, we have 425 schools that have permanently closed, private schools po ito,” Poa said during a press briefing at the DepEd office in Pasig City. Poa said that while private schools have autonomy, DepEd may still exercise supervision over them and may extend will still look into possible assistance they could give to the private schools. “The private schools, in terms of management, have autonomy, in a way,” Poa said. “We have reasonable supervision and regulation in our private schools. So I guess we will see in the coming days kung ano ang pwede namin maitulong (to see what we could do),” Poa added. 

 

This dynamic represents a disturbing development. It is not only in the economic aspects of the industry and the broader economy, but more importantly, it is portentous of the sociological dynamic. 

 

The quality of the educational backdrop of the citizenry will likely deteriorate due to this growing educational inequality.  

 

Education will shift its focus to rote learning and conformity than developing critical, competitive, and constructive thinking.  

 

For the average people, such dynamic points to the increasing dependence on politics for their survival and livelihood. 

 

The increasing cartelization/monopolization also means that there will be less interest in market entrepreneurship. On the other hand, it also implies more public interest in political and bureaucratic careers and political entrepreneurship.  

 

In effect, the centralization of education further entrenches socialism into the public's psyche. 

 

John Stuart Mill (1959) explained: A general State education is a mere contrivance for moulding people to be exactly like one another: and as the mould in which it casts them is that which pleases the predominant power in the government, whether this be a monarch, a priesthood, an aristocracy, or the majority of the existing generation; in proportion as it is efficient and successful, it establishes a despotism over the mind, leading by natural tendency to one over the body.   

 

And the broadening of socialism, which is anti-property rights and anti-markets, should benefit the stock markets? 

 

_____ 

Prudent Investor What Happened to the Blockbuster Election Spending Fueled 2Q GDP? August 15, 2022  

 

Financial Stability Coordinating Council (2018), 2017 Financial Stability Report p.27, Bangko Sentral ng Pilipinas  

Prudent Investor, The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka July 11, 2022 

 

Stuart Mill, John (1959) On Liberty p.97, Batoche Books 2001 McMaster University 

 

Yours in liberty, 

 

The Prudent Investor Newsletters