The Political Economy of Corruption: How Social Democracy Became the Engine of Decay

 

In a world of uncertainty, no one knows the correct answer to the problems we confront and no one therefore can, in effect, maximize profits.  The society that permits the maximum generation of trials will be the most likely to solve problems through time (a familiar argument of Hayek, 1960).  Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems—Douglass North 

In this issue

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

Part I: How Social Democracy Sows the Seeds of Corruption

IA. Corruption Starts with the Electoral Process

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine

IC. A Caveat: Between System and Choice

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers

IF. The Limited Access Orders: Elite Stability Through Controlled Competition

IG. The Financialization of Patronage

IH. Ochlocratic Democracy and the Squid Game Parable

II. The Tragic Paradox of Philippine Social Democracy

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise

IID. The Policy Backlash: Easy Money Meets Fiscal Decay

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

From ballot to budget, the Philippine political economy drifted from progress to patronage—where fiscal populism and elite collusion sustain the illusion of democracy 

Part I: How Social Democracy Sows the Seeds of Corruption 

IA. Corruption Starts with the Electoral Process

Figure 1

Corruption begins not in backroom deals—but at the ballot box. 

How much does a candidate spend to get elected? 

While formal spending limits exist under law, field estimates and media-monitoring data reveal that actual campaign expenditures, especially at the national level, reach hundreds of millions to billions of pesos. In urban settings, Barangay officials reportedly spend upwards of Php 500,000, city councilors tens of millions, and candidates for national seats billions. (Figure 1) (see reference) 

Given their modest stipends, what motivates them and their backers to pour in such vast sums? Patriotism? Or the expectation of returns—through power, access, and extraction? 

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine 

Here, Public Choice Theory—or as the late Economist James Buchanan artfully defined it—"politics without romance," strips away the illusion of altruistic politics. (see reference) 

Elections, far from being contests of ideals, are investments in rent-seeking. Politicians rationally pursue interventions—public works, subsidies, welfare programs—that expand budgets and open opportunities for returns. 

Barangay officials, for instance, may build health centers or basketball courts to tout “accomplishments,” while pocketing funds through overpricing, commissions, or other channels within their networks. 

At the grassroots, popular barangay projects—covered courts, health stations, road repairs—serve dual purposes: visible service and invisible extraction. These projects justify budget allocations while enabling leakage through padded contracts and favored suppliers. The barangay becomes a microcosm of the national rent machine. 

That is, the larger the government’s footprint, the larger the potential rents.

Fiscal expansion is often framed as developmental necessity. In reality, it’s a mechanism for rent distribution. More projects mean more contracts, more intermediaries, more leakage—and most importantly, more VOTES.

Politicians push for interventions not to solve problems, but to create extractive opportunities and extend their tenure.

IC. A Caveat: Between System and Choice

As a caveat, while the seeds of corruption are sown in the electoral system—where incentives reward control, manipulation, and extraction through patron–client ties and dependency-building programs—individual agency still matters. Not all who enter the system succumb to its temptations.

We must resist the fallacy of division: the idea that because the system is corrupt, every actor within it must be. While many—or even most—may exploit the structure, others attempt to navigate it with integrity, often at great personal and political cost.

Moreover, corruption is not monolithic. Its degree, visibility, and method vary:

• At the barangay level, corruption may be more modest—petty overpricing, padded logistics, or informal commissions.
• At the national level, it scales. Many officials may not directly pocket funds from projects. Instead, some exploit indirect mechanisms—through layered corporate networks, proxy ownerships, and business interests within their jurisdictions.

In such cases, transparency tools like the SALN (Statement of Assets, Liabilities, and Net Worth)—while symbolically important—often remain cosmetic. They measure disclosure, not control. As such, they are easily gamed, rarely enforced, and structurally blind to the artifice of legally structured beneficial ownership. 

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

Over time, this incentive structure breeds dynastic entrenchment. Voters become dependent on welfare, contracts, and subsidies—reinforcing the very system that sustains them.

Political families consolidate control over access to state resources, while bureaucracies serve as vehicles for loyalty rather than performance.

Here, Douglass North’s concept of adaptive efficiency becomes central. In healthy societies, innovation and problem-solving emerge through decentralized experimentation—allowing multiple actors to test ideas and learn over time.

But in a captured social democracy, decision-making becomes centralized, risk-averse, and politically motivated.

Instead of adaptive efficiency, the system evolves toward extractive efficiency—maximizing rent extraction rather than problem-solving. Every “reform” becomes another opportunity for patronage. 

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers 

When a measure becomes a target, it ceases to be a good measure. 

Goodhart’s Law explains why governance quality erodes: once developmental indicators—poverty reduction, infrastructure spending, digitalization—become political targets, they cease to measure real progress.

Politicians and bureaucracies chase metrics, not meaning. Budgets swell to create the optics of success, even as institutional capacity stagnates. 

Despite headline growth, nearly half of Filipino families still identify as poor, and hunger rates remain stubbornly high—underscoring the dissonance between GDP triumphalism and lived reality. 

The logic of numbers has replaced the logic of outcomes. For instance, infrastructure becomes a scoreboard; social amelioration, a campaign metric. 

What cannot be measured—quality of life—disappears from governance priorities. 

IF. The Limited Access Orders: Elite Stability Through Controlled Competition 

North, Wallis, and Weingast’s framework of Limited Access Orders capture this equilibrium. In such systems, elites maintain stability by controlling access to political and economic privileges. Violence is contained not through rule of law, but through negotiated rents among dominant coalitions. 

Competition—whether electoral or market—is not eliminated, but managed to prevent instability. 

In the Philippine context, the political economy resembles a cartel: quasi-competition among elites crowds out MSMEs through the BSP’s easy-money regime and the regulatory state. 

Access to capital, permits, and protection is rationed—not by merit, but by proximity to power. 

The ruling oligarchy—masquerading as democratic elites—justifies this concentration through the promise of trickle-down prosperity. Anchored on a record-high savings-investment gap, the benefits rarely diffuse. They consolidate, reinforcing privilege and power. 

Corruption, then, is not a malfunction. It is the stabilizing mechanism of the political order. Public works and welfare programs distribute rents downward to maintain consent, and upward to preserve privilege. 

IG. The Financialization of Patronage 

The BSP’s easy-money regime acts as the lubricant of this system. Cheap credit, monetized deficits, and liquidity injections sustain the illusion of prosperity. Fiscal populism flourishes, financing both vote-buying and elite projects under the banner of “inclusive growth.”

Figure 2

Yet as public debt expands (Php 17.468 trillion in August) and private credit is crowded out (Bank compliance of MSME lending share 4.59%), efficiency dissipates, innovation recedes, and systemic risk mounts. (Figure 2, upper image)

The same elites who dominate politics now dominate finance—transforming competition into collusion. What began as political capture of budgets has evolved into financial capture of capital. Bank’s net claims on central government (NCoCG) reached Php 5.445 trillion or 31% of public debt, last August. (Figure 2, lower graph)

However, elite finance no longer thrives on production, but on asset transfers anchored in debt—rent extraction by other means.

IH. Ochlocratic Democracy and the Squid Game Parable

Social democracy becomes a shell—democratic in ritual, oligarchic in practice. Elections legitimize extraction. The state grows as both employer and benefactor. Bureaucracies serve dynasties. Welfare becomes vote collateral.

Philippine politics drifts toward ochlocracy—where collective dependency replaces civic reason, and politics becomes an auction of favors.

In the popular Korean drama Squid Game, participants vote democratically on whether to continue the deadly contest. It’s a grim parody of ochlocratic democracy—where the masses “choose” within a system they cannot change, while elites watch from above, entertained by their struggle.

Philippine politics mirrors this cruel symmetry: voters play the game of elections, but the rules—and the rewards—belong to the few who own the arena.

This is the tragedy of ochlocratic democracy: people mistake participation for power, and choice for change.

II. The Tragic Paradox of Philippine Social Democracy

The paradox is tragic. Social democracy began as an ideal of empowerment, but its penchant for populist collectivism and institutional capture devolved into systemic dependency. It rewards extraction over experimentation, and loyalty over learning and entrepreneurship.

As North warned, prosperity depends not on good intentions or efficient markets, but on institutions that foster experimentation, decentralization, and accountability. When these vanish, societies lose their adaptive capacity—and settle into the stability of decay. 

That decay now finds fiscal expression. 

The controversial 2025 national budget, packed with pork-laden projects, confidential allocations, and populist welfare programs, does not represent governance—it exposes social democracy’s rent-distribution paradigm.

It is the modern stage of our own Squid Game democracy: grand spending justified by social ideals, yet orchestrated to consolidate power. The next step forward is not reform in name, but reckoning in structure.

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending 

The opening of the public spending Pandora’s Box exposes the government’s MIDAS touch—except that what it touches doesn’t turn into gold but corruption. From overpricing to kickbacks, bribery to ghost projects, and more, allegations of improprieties have emerged not only in flood control programs but also across farm-to-market roads, election platforms, healthcare centers, the DICT’s WiFi subscription services, LTO license plates, and more yet to come. 

The iceberg unravels. 

We recently wrote: 

Authorities hope for three things: 

• That time will dull public anger
• That the probe’s outcome satisfies public appetite
• That new controversies bury the scandal

But history warns us: corruption follows a Whac-a-Mole dynamic—until it hits a tipping point.

Here is what we missed. 

In a striking inversion of democratic logic, the Philippine Navy’s recent warning—that public outrage over flood control failures may expose the nation to foreign propaganda—reveals a deeper institutional reflex: the impulse to reframe civic dissent as geopolitical vulnerability. 

The narrative is shifting: from corruption to propaganda, from domestic failure to foreign destabilization. In this alchemy of blame, scandal becomes sovereignty, and criticism becomes treason. 

The Thirty-Six Stratagems offer an apt lens: “Let the enemy’s own spy sow discord in his own camp.” When power is cornered, it conjures enemies to restore cohesion—sowing the seeds of conflict, via diversion, to preserve its own survival. 

By invoking the specter of foreign interference, the regime deflects attention from systemic rot to imagined threats, weaponizing patriotism against dissent. 

Yet one must ask: is the Philippine military also attempting to obscure internal corruption within its own agency? 

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

Figure 3

Despite the domino trail of corruption being exposed, political authorities recently passed the 2026 budget of Php 6.793 trillion—up from this year’s enacted Php 6.326 trillion. Though this marks a 7.4% increase, it rose by Php 467 billion from last year, the fourth highest ever. (Figure 3, topmost chart) 

The House of Representatives even increased its allocation by Php 10 billion. 

However, the Bureau of the Treasury quietly revised the 2025 expenditure target downward—from Php 6.326 trillion to Php 6.082 trillion—likely after realizing it had overestimated non-tax revenue projections. 

All things equal, this translates to an 11.7% increase or ₱711 billion, the largest peso expansion in Philippine fiscal history. 

While actual spending this year may fall below the enacted budget, history suggests it will still exceed the revised target. 

In any case, because corruption is often framed in binary terms—black or white, good or evil—the 2026 budget signals that the establishment expects the scandal to breeze over and the good times to continue. 

This echoes Aldous Huxley’s warning:

That men do not learn very much from the lessons of history is the most important of all the lessons of history. 

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise 

While the September Php 248.1 billion deficit was reported as having narrowed from last year—due to a 7.5% decline in expenditures amid DPWH embroilment— few noted that public revenues also fell by 5.99%. 

Yes, tax revenues grew: BIR up 4.74% YoY, BoC up 5.25%. But non-tax revenues collapsed by 65.8%. 

The quarterly and year-to-date numbers reveal a broader slowdown: (Figure and Table 3, middle and lower windows) 

Q3 2025: -3.22% revenues, +4.47% tax revenues (BIR +4.87%, BoC +3.297%), non-tax -48.24%

Q3 2024: +16.95% revenues, +11.7% tax revenues (BIR +14.7%, BoC +3.61%), non-tax +61.7%

9M 2025: +2.2% revenues, +8.6% tax revenues (BIR +10.9%, BoC +1.6%), non-tax -34.7%

9M 2024: +16.04% revenues, +10.6% tax revenues (BIR +12.73%, BoC +4.6%), non-tax +62.85% 

The bottom line: where revenues are conditioned on economic performance and administrative capacity, the Q3 slowdown signals deeper economic weakening—dragging down the 9M performance. The GDP leads tax collections. 

Yet, the public barely realizes that the economy is tacitly emaciating, while the corruption scandal, which partly curtailed spending, exacerbates the decline.

Figure 4

Despite the September contraction in public spending, 9M YoY growth slipped from 11.6% in 2024 to 5.2% in 2025. Still, public spending hit an all-time high of Php 4.484 trillion. Figure 4, topmost visual) 

As a result, the 9-month deficit swelled to Php 1.117 trillion—just 1.92% or Php 21.85 billion shy of the historic Php 1.139 trillion budget gap during the pandemic recession year of 2021 —an astounding fiscal gap without a recession. (Figure 4, middle diagram) 

A massive pandemic-sized fiscal backstop without a crisis—what is the government not telling the public? 

IID. The Policy Backlash: Easy Money Meets Fiscal Decay 

One might add: all this unfolds amid the BSP’s easing cycle—marked by interest rate and RRR cuts, plus a doubling of deposit insurance. 

All told, the economy now reels from the unintended consequences of overlapping policies:

• Bank-financed asset bubbles,
• Crowding-out of private credit,
• The soft USD-peg, and
• Implicit backstops for bank balance sheets. 

Together, these reinforce malinvestments that distort both fiscal and monetary stability. 

Once again, from our September post (bold original): 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

This means that an extended softening of GDP entails a much higher deficit-to-GDP ratio—recently adjusted to 5.5% for 2025.

Crucially, few realize that further slippage in this ratio amplifies the risk of a fiscal shock—a scenario no longer theoretical but increasingly imminent.

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance 

Yet what policymakers increasingly celebrate as "fiscal discipline" may in fact be a statistical mirage. 

The narrowing of the deficit-to-GDP ratio, often paraded as proof of resilience, conceals deeper structural decay beneath the surface. (Figure 4, lowest chart) 

For while nominal figures appear stable, the underlying engine of growth—real production, capital formation, and household income—has been hollowing out. The economy’s apparent balance is not born of strength, but of accounting illusion. 

The obsession with deficit-to-GDP optics reveals how politicians and bureaucrats chase statistical benchmarks—or what I call as ‘benchmark-ism’—over structural integrity. As the ratio falls—even while real GDP softens—authorities infer that deeper deficits carry little cost. 

Numerically, the ratio implies GDP is outperforming the deficit, either through faster nominal growth or slower deficit expansion. But this dissonance masks a dangerous illusion: debt-financed deficits now comprise a substantial and growing share of GDP. 

The economy’s rising dependency on public spending, funded by mounting debt, creates a fragile equilibrium. 

Once the extraction and redistribution mechanism weakens—manifesting as a sharp GDP decline—the ratio could spike violently. 

In all, the falling deficit-to-GDP ratio conceals the economy’s eroding capacity to absorb and repay debt. It’s not a sign of resilience, but a warning of latent fragility. 

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State 

This leads us to debt. 

Media and authorities entertain us with a dramatic 71.1% plunge in BSP-approved FX borrowings in Q3 2025, projecting an image of fiscal prudence and stability. 

Officials attribute the slowdown to the “frontloading” of offshore financing earlier in the year. 

Yet BSP approved $12.28 billion in the first 9 months of 2025—up 16.1% from $10.58 billion in the same period last year. For context, BSP approved $13.8 billion for the full year 2024. 

What they fail to highlight is that the Q3 deficit—among the largest on record—pushed the 9-month shortfall to 2021 levels. This demands financing. The data suggests BSP either shifted operations through banks, reclassified borrowings via accounting gymnastics, or pivoted to peso-denominated debt.

Figure 5

What BSP’s data shows supports this view. In August, banks’ net foreign assets surged 45% year-on-year, while the BSP’s claims rose by a mere 0.7%. This divergence indicates a clear shift in FX borrowing and asset buildup from the BSP and national government toward the banking sector. (Figure 5, topmost graph) 

In effect, external leverage didn’t disappear—it was privatized, migrating into bank balance sheets where it escapes fiscal scrutiny but magnifies systemic risk. 

However, financing did slow in September, marking a second consecutive decline. This pulled 9-month financing back to 2024 levels, implying a slowdown in national debt growth—even as deficits soared past last year’s. Again, this hints at rescheduling maneuvers or creative fiscal accounting. (Figure 5, middle pane) 

We saw a similar pattern with amortization. Media and consensus proudly cited a debt financing slowdown in 1H 2025. But analyzing the June deficit, we surmised in August that this reflected one or more of the following: Scheduling choices, prepayments in 2024 and political aversion to public backlash 

Amortizations resurfaced by August, and September data reinforced the rebound. 

More strikingly, interest payments surged 15.4% in September, pushing their 9-month share of expenditures to 14.85%—the highest since 2009. (Figure 5, lowest graph)

Figure 6

Combined, amortization and interest payments in the first 9 months of 2025 already exceed 2023’s annual totals and sit just 7.5% below 2024’s all-time high— with a full quarter remaining! (Figure 6, upper chart) 

Meanwhile, foreign-denominated debt servicing fell 35% in September—its fourth straight monthly decline and the largest yet. This pulled its 9-month share of total debt servicing down from 21.04% in 2024 to 19.7% in 2025. (Figure 6, lower image) 

What’s apparent is a deliberate effort to paint macro stability by suppressing FX loan exposure. 

But in doing so, even if a fiscal shock doesn’t erupt in 2025, its shadow has: the pullback in FX loans weakens BSP’s structural defenses for its ‘soft peg’ regime. 

Finally, while we view the deficit-to-GDP ratio as a flawed metric, its relevance to consensus sentiment remains. A shock could send USD/PHP soaring, stocks plummeting, inflation spiking, rates rocketing and the economy stumbling—a chain reaction born of fiscal manipulation disguised as discipline. 

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The current flood control scandal reaffirms the lessons of the EDSA I and II Revolutions: corruption is not a binary, black-and-white event underwritten by good or bad ethics, but a symptom of a broader, deeper, and entrenched political-economic pathology called social democracy—where elections are treated as opportunities to gain both political capital and economic power through tenure-based rent-seeking. 

Thus, the systemic drift deepens toward free lunch policies—protecting the interests of a privileged few, while masking them as welfare interventions for the many. These “trickle-down” redistributions, in practice, breed dependence and disincentivize productivity. 

Intervention begets intervention, as every maladjustment and distortion calls forth another. 

As of this writing, the Philippine leadership has ordered a 50% cut in construction material prices while previously imposing both price ceilings on rice (MSRP and the “20-peso rollout”), and recently, price floors on palay farmgate prices.

Each measure deepens the drift toward centralization or socialism. 

The entropic consequences of the ochlocratic–social democratic regime are now manifesting even in embellished government data—suggesting that worsening conditions can no longer be shielded by the gaming and manipulation of marketplace and statistics (GDP, CPI, fiscal deficit, and debt among the most politically sensitive). 

The more the state intervenes to sustain the illusion of stability, the faster its underlying contradictions compound. 

The emergence of deeply seated corruption amid an ongoing economic slowdown exposes not only the late-cycle phase transition—but also Kindleberger’s drift toward the age of swindles, fraud, and defalcation. 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable. 

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II. 

____ 

References 

Based on legal caps under RA 8370 and RA 7166 and independent estimates (PCIJ, Inquirer, SunStar), actual campaign spending in competitive areas far exceeds statutory limits.

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

Prudent Investor Newsletters, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

 

Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom

 

The Greeks had implicit faith in the ability of the government to take care of their needs. It seems never to have occurred to them that the individual person is self-controlling and responsible for his own acts. They labored under the delusion that their democracy was a guarantee of peace and plenty, not realizing that unrestrained majority-rule always destroys freedom, puts the minority at the mercy of the mob, and works at cross-purposes to the effective use of human energy and individual initiative.' Paradoxically, when not kept within bounds, the democratic process has always led to the destruction of democratic ideals and has served as a springboard to dictatorship and war. The temptation to buy votes through governmental spending is too great —Henry Grady Weaver 

 

In this issue 

 

Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom 

I. Have the National Elections Traumatized the Domestic Financial Markets? 

II. Why the Amplified Volatility? Price Setting Actions of Foreign Selling Prior to Post-Elections 

III. No Trend Goes In a Straight Line: Oversold PSEi 30 Due For Bounce; Bear Market or Correction? 

IV. Yields of Philippine Treasuries Surge Post Elections! 

V. Deepening Financialization, Greater Interest Rate Risks 

VI. The Low-Base Effect of Q1 8.3% GDP: Quarantine Restricted versus Reopening GDP 

VII. Q1 GDP Reinforces the Thrust to Centralize the Economy 

VIII. Election Spending Fueled Consumer Boom! 

IX. A Fuel Subsidy Induced Boom in the Transport Sector? Retail GDP vs.  SM Retail Sales and Food CPI vs. JFC Sales 

 

Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom 

 

In an environment where liquidity is under pressure, political uncertainties amplify the vulnerabilities of fragile markets.  

  

Despite the conclusion of the national elections and eye-popping Q1 GDP, the PSEi and treasury markets wilted against the barrage of selling in the expectations of higher inflation.  

  

The oversold PSEi 30 is due for a rebound. But this should mark a dead cat's bounce.  

  

The low-base effect comparing the Pandemic and Reopening, consumer 'boom' from the election spending binge, and a repressed CPI contributed to the outsized GDP. 

  

Q1 Sales of SM Retail and Jollibee contrasts with the Q1 Retail and Food GDP. 

I. Have the National Elections Traumatized the Domestic Financial Markets? 

 

Let us open with several news quotes. 

 

Inquirer: May 10: The interest rates sought by local creditors on short-term government borrowings soared on Tuesday (May 10), a day after partial, unofficial results showed Ferdinand Marcos Jr. with an insurmountable lead in the presidential race. With a domestic debt market jittery about high inflation, which think tank Moody’s Analytics last Monday said will be a “headache” for the next administration, the Bureau of the Treasury (BTr) was able to borrow only P5 billion out the P15 billion it wanted to raise from short-dated T-bills. 

 

Inquirer, May 10: American financial services giant J.P. Morgan dropped the Philippines to the bottom of an investment list comprised of its Southeast Asian peers in a new report released after it became clear Ferdinand “Bongbong” Marcos Jr., the namesake son of the late dictator, was headed for a landslide win on Monday’s presidential elections. J.P. Morgan did not mention Marcos’ name in the May 9 report that flagged rising risks from high public debt and surging inflation – factors it said would slow economic growth and hurt corporate profits. 

 

Inquirer, May 11: With a campaign lacking in details on how the perceived winner in the May 9 polls intends to manage the economy, the private sector has shifted to a wait-and-see mode until former Sen. Ferdinand Marcos Jr. outlines his plans and names his economic team. Investors are eagerly awaiting the lineup of the next administration’s Cabinet as they evaluate the prospects under a new leadership, considering the big challenges such as rising inflation and a mountain of debt to the country’s recovery from a pandemic-induced recession. 

 

Bloomberg/Taipei Times May 11: Foreign investors are on wait-and-see after elections in the Philippines won by Ferdinand Marcos Jr and a rally in the equities market might be a challenge, Philippine Stock Exchange President Ramon Monzon said yesterday. “Further upside? It’s going to be tough. We have a lot of macroeconomic problems,” Monzon said in an interview with Bloomberg TV. 

 

Some people harbor the impression that the outcome of the national elections had little to do with last week’s bloodbath in the PSEi 30. 

  

They blame external factors instead. This rationalization is an example of attribution bias. 

 

While this may be partly valid, nothing exists in a vacuum. Differently put, long-term market actions tend to smooth out interim price volatility. And volatility is a product of existing socio-economic conditions. 

 

But was the carnage an anomaly? Or was it part of the composite trend?  

 

Strikingly, no one seems to ask, what causes volatility?  

  

Genuine free markets are unlikely to generate systemic boom-bust cycles because they operate on decentralized forces. Without a unifying link, market forces handily absorb the failures of some enterprises to redeploy unproductive resources for productive uses.  

 

In the markets, volatility would represent specific issues rather than a broad-based phenomenon.  

 

That is to say, when authorities tamper with money, economic and financial imbalances accrue. Easy money policies primarily fuel an unsustainable boom, which leads to its eventual perdition. The boom-bust process implies magnified fluctuations or volatility in the marketplace.  

  

For instance, under the camouflage of the pandemic, the BSP injected a record Php 2.3 trillion to propel markets higher to combat deflation. Yet, has anyone ever thought of the longer-term consequences of such massive infusions? Or, can it only benefit the economy without costs? If so, why stop at Php 2.3 trillion? Why not Php 20 or 100 trillion? Why not print our way to prosperity? The answer is that there are costs, which the BSP does not explain to the public. 

 

And economic maladjustments are not solely from the sphere of money; political interventions also play a crucial role. 

 

II. Why the Amplified Volatility? Price Setting Actions of Foreign Selling Prior to Post-Elections 

  

And so why the current volatility? 

  

Faced with perceived untoward external developments, the exit of foreign funds should not induce anxiety in robust domestic markets operating on salutary economic fundamentals.  

  

While some realignments may cause partial dislocations, a resilient market economy can afford them because of their malleability.  

 

And because free markets have the tendency for capital accumulation, these are likely to be used against losses incurred by specific firms for redeployment. 

  

Again, that is not the case when the entrenched misdirection of resources from political dependence results in the economy becoming rigid or inflexible. Insufficient savings from capital consumption activities further reduces the adaptability of the economy.  

 

A byzantine regulatory regime further stifles small businesses in many dimensions, covering the creation, expansion, and survival.  

  

So when perceived changes in the economy magnify the perception of risks relative to returns, foreigners may choose to relocate their investments elsewhere. Or, they may opt to stay liquid.  

 

The thing is, if construed as a safe-haven from adverse external developments, domestic markets can even see inflows! 

 

In any case, aggressive sellers tend to seek the next level of buyers should there be insufficient volume to meet the price offered at existing levels.  Thus, in a selloff, marginal sellers set the decline in prices.  

 

Bluntly put, in the PSE, the peso volume represents a critical factor in the marketplace. 

  

With low volume, an overpriced market dependent on liquidity flows becomes prone to the magnification of volatility. 

 

Figure 1 

 

The benchmark PSEi 30 plummeted by 5.63% this week, the largest in 2022 and the second sharpest fall since the week of January 29, 2021. From the week ending April 22, the headline index plunged 8.8%. 

 

As repeatedly said here, despite the unprecedented injections by the BSP, the peso turnover remains insufficient to support its rally.  Since peaking in early February, the peso volume has steadily dropped, pushing the index lower. (Figure 1, topmost window) 

 

And since March, selling activities by foreign money began to rev up, but they remain a minority relative to the share of transactions.  

 

Shorn of volume, foreign sellers started to dictate the price and tempo of declines despite the historic pre-closing pumps. (Figure 2, second highest window) 

 

This week, foreign money sold Php 4.16 billion worth of shares. Foreign trade represented only 33% of total turnover. The share of foreign trade has steadily declined since 4Q 2019. (Figure 1, second to the lowest window) 

 

The scale of foreign selling crescendoed as the election neared. And the anxiety was further reinforced by the outcome of the national elections.  

 

As proof, market participants of the PSE discounted the announcement of the seemingly splendid 1Q 2022 GDP.   

 

In my humble opinion, slowing monetary liquidity, represented in the PSE as volume turnover, compounded by political uncertainty, prompted this fiasco.  

 

Why the uncertainty? The news quotes elaborate on the symptoms. 

 

In any case, perceived as legit, the historic popular vote represents an extension of the neo-socialist policies of the incumbent administration.  

 

How is socialism, in many of its variant forms, compatible with the market? 

 

No one bothers to ask. 

 

III. No Trend Goes In a Straight Line: Oversold PSEi 30 Due For Bounce; Bear Market or Correction? 

 

Yet, no trend goes in a straight line.  

 

That said, the oversold PSE is due for a material bounce.  

 

Aside from the transition to the death cross, the rounding top of PSEi 30 seems to have broken its neckline. Yet, the coming rebound may likely find resistance at this neckline or around its proximity.  

 

Interestingly, some see this meltdown as a "correction".  

  

From the high of 7,502.48 on February 9, 2022, a 15% slide certainly does look like a correction.  

  

But when seen from the record acme of 9,401.2 on January 29, 2018, which translates to a 29% deficit, the PSEi 30 remains in a bear market.  (Figure 1, lowest window) 

 

What you see depends on where you stand. Biases determine the framing of one's mind. 

 

IV. Yields of Philippine Treasuries Surge Post Elections! 

 

 

Figure 2 

 

The Treasury markets represent an ignored but the more crucial factor of market perception.  

 

Unlike stocks, there have been continuing liquidations in the treasury markets signified by surging yields. Treasury yields have been on an uptrend since 2020 and have been accelerating upwards. (Figure 2, topmost pane)  

 

The irony is that after the recent slowdown, weekly BVAL benchmark yields spiked sharply right after the elections! The mirror image was that selling in the Treasury markets intensified! 

(Figure 2, second to the highest pane)  

 

And yes, while climbing yields have represented a regional phenomenon, the pace of gains varies, signifying distinct and idiosyncratic conditions of economies. 

 

The Philippines trails Thailand and China in terms of nominal yield growth (YTD). (Figure 2, second to the lowest pane)  

 

An institution quoted by the news provides a valid observation: the fixed income market expects higher inflation from the new administration.  

 

Let me add: another force to reckon with should be the rise of default risks. 

 

In the transition to the new administration, the outgoing regime insidiously implemented two controversial measures.  

 

It increased minimum wages in the NCR and other regions. Small businesses will bear its brunt while favoring firms of the elites. Also, since minimum wages signify a form of price control, it adds to imbalances in the economy, increasing its vulnerability to more inflation!  

 

As I have been saying here, the bias for political interventions and centralization demonstrates the structural nature of inflation forces in the economy.  

 

It also implemented the unpopular increases in Philhealth’s premiums, which will be retroactively applied.  

 

Woe to the consumers! 

 

There is more. 

 

V. Deepening Financialization, Greater Interest Rate Risks 

 

There seems hardly any realization of the critical role interest rates risk/duration risk plays in an environment transitioning to Financialization. 

 

And Financialization is an offspring of the easy money policies of the central banks. Money supply growth represents about three-fourths of the published GDP through 2021 and counting... (Figure 2, lowest pane)  

 

PSE companies are the most substantial credit takers in the financial system.  

 

So, aside from spiking inflation, rising rates will compound the pressures on their profit margins. But it gets worse. A sustained rise in rates will also siphon liquidity for operations and expansion, increasing their susceptibility to credit risks. 

 

Circling back to the PSE, financial conditions will determine its turnover, which means unless the selloffs in the treasury markets abate, one can expect a low volume environment to persist.  

 

The primary source of financial liquidity is the banking system. Savings is part of this story.   

 

In this financial context, rising rates magnify the risks of further liquidations in the face of a highly leveraged system. 

 

Sad to say for those hopeful about the recently concluded elections, market evolution points to the climax of the salad days of record public spending and deficits.  

 

The late former Prime Minister of England famously said,  

 

The problem with socialism is that you eventually run out of other people's money. 

 

Referred here is the purchasing power of money.  Central banks can always "print" money. 

 

As a side note, the USD peso, nestled at the resistance, escaped the heat from the recent selling spree, which should be a fascinating development. 

 

VI. The Low-Base Effect of Q1 8.3% GDP: Quarantine Restricted versus Reopening GDP 

  

The huge 8.3% GDP of 1Q 2022 represents one of the spins behind rising yields/rates. 

  

Again, there might be some truth to this, but it ignores the basics of the BSP policies, public debt levels, and the inflationary biases of a neo-socialist economy.  

  

Because of its outperformance, the backward-looking consensus piled upon each other to upgrade their GDP outlook. 

 

Authorities further predict that the GDP will recover its pre-pandemic levels. 

 

But neither the nominal values of the real GDP nor household consumption supported this idea.  

 

 

Figure 3 

 

Real GDP values dropped back to reinforce a secondary trend line. (Figure 3, upmost window) 

 

On the other hand, with nominal values giving up on the revenge spending of household GDP in Q4, household GDP also strengthened the case of a secondary trend line or slower GDP over time. (Figure 3 middle pane) 

 

In any event, the exemplary gains of the 1Q represented primarily a product of the low-base effect from the GDP contraction of 3.8% in the same period last year.  

 

The 1Q thus represented a Quarantine Restricted against Reopening GDP. 

 

Hey, but the GDP is a government construct! 

 

VII. Q1 GDP Reinforces the Thrust to Centralize the Economy 

 

Real household consumption GDP ramped up by 10.1% in Q1 2022.  

  

Based on PSA data, employment rates improved slightly by 1.3% in 1Q 2022. It expanded from 92.9% in 2021 to 94.2% in 2022. (Figure 3, lowest pane) 

 

With conditions in the labor force hardly providing the anchor for this boom, what exactly was the source of this growth? And how was this funded? 

 

As an aside, the SWS has a starkly divergent view of the labor force. 

Figure 4 

At any rate, despite its bounce, the share of household GDP remains on a critical downtrend. (Figure 4, topmost pane) 

  

And opposite to the households is the Government GDP. 

  

While it registered a measly 3.6% growth, its uptrend remains intact and continues to accelerate higher. Government Consumption accounted for 14.6% of the real GDP, excluding public construction spending. (Figure 4, middle pane) 

  

The Household-Government GDP data exhibits the transitioning relationship to denote the rapidly growing role of the government, which comes at the expense of the household contribution. 

 

In the context of the economy, since the government is not a wealth producer, a growing share of the GDP translates to more redistribution, effectively reducing economic productivity. 

 

To business planners, the evolving relationship represents a disturbing development. Instead of focusing on consumers to gain market share or improve margins, businesses would have to shift attention toward capitalizing on the growth of the public sector.  

 

Increased politicization represents the metamorphosis of the economy, manifesting the implicit thrust to centralize it. 

 

The public spending-revenue share of the GDP also exposes the inflationary bias of the system. Public expenditures continue to swell hence, confirming the developments in the GDP. (Figure 4, lower pane) 

 

However, the proportion of public revenues continues to decline, manifested by the record deficit and public debt. 

 

The easy money policies of the BSP allowed, accommodated, and promoted this transition.  

 

But this era is approaching its culmination.   

 

VIII. Election Spending Fueled Consumer Boom! 

 

Again, what spurred the so-called consumption boom in 1Q 2022? 

 

We offer a guess: Election spending! 

 

We noted that LGU spending came at record highs in Q1. Not only funded by the Bureau of Treasury, but LGUs went into a borrowing spree!  

 

Cash in circulation also grew at an unprecedented nominal value. 

 

The Impact of Vote-Buying; the April CPI Breakout; The Structural Foundations of Inflation May 9, 2022 

 

A torrent of election money flooded the economy! 

 

That windfall naturally filtered into consumer spending, which spruced up the GDP. 

 

As noted here, aside from the low-base effect and election spending, the depressed CPI likewise bolstered the GDP. 

 

IX. A Fuel Subsidy Induced Boom in the Transport Sector? Retail GDP vs.  SM Retail Sales and Food CPI vs. JFC Sales 

 

Here are some other interesting observations from the GDP data. 

 

Figure 5 

 

The transport sector was one of the fastest-growing sectors in Q1! Remember the brouhaha about fuel subsidies to plug income deficits from record oil prices? (Figure 5: highest window) 

 

Why would a sector require subsidies when it grew at a stunning rate of 26.5%? Or was the sector’s growth due to inflation and the subsidies? 

 

The realm of inconsistencies belongs to the world of statistics and politics. 

 

And there’s more. 

  

While the household consumption GDP failed to recover its pre-pandemic trend, the retail GDP has already accomplished what its consumers missed. (Figure 5: middle window) 

 

Following a smoldering Q4, real and current retail GDP retreated slightly from its record highs. Real retail GDP expanded 7.3% in Q1.  

  

Unfortunately, the retail GDP has diverged from the retail or merchandise sales performance of SM Investments, the largest retail chain nationwide, which dropped back to 2018 levels! (Figure 5: lowest window) 

 

And it is not just retail. 

  

 

Figure 6 

 

In Q1 2022, Real food GDP rocketed by 20.7% to bring its peso value levels close to the 2019 highs. The current priced food GDP carved a new record! (Figure 6, highest pane) 

 

With a vibrant Food GPI, why did the food CPI flounder in Q1? Too much supply? (Figure 6, middle pane) 

  

Here is the thing. Domestic sales of the largest food retailer, Jollibee Foods, in the 1Q have barely resonated with the GDP. JFC sales, which posted a 21.23% YoY in Q1, saw its domestic sales in peso retreat to 2017 levels. (Figure 6, lowest pane) 

  

Of course, a boom may have occurred in the retail and food sectors outside these titans. But how would this happen? 

  

If not, which of these data should we give credence? 

 

Finally, from the standpoint of SM and JFC, election spending might have contributed to their sales, but it was not enough to lift them back to anywhere close to pre-pandemic levels.  

 

Why would it? Just ask the Treasury Markets. 

 

Yours in liberty, 

 

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