Is the Philippines on the Brink of a 2025 Fiscal Shock?

 

You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting). Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying—Ray Dalio

In this issue

Is the Philippines on the Brink of a 2025 Fiscal Shock?

I. A Brewing Fiscal Storm?

II. April 2025 vs April 2024: A Sharp Deterioration

III. Four-Month Performance: Weak Revenue Momentum

IV. Weak Revenue Despite Loose Conditions: A Structural Problem?

V. Budget Math: A Deficit Blowout in the Making?

VI. Economic Fragility Threatens Further Revenue Weakness

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

B. External Trade: Consumer Import Growth Sharply Slows

C. Headline and Core CPI: More Evidence of Demand Weakness

D. Labor Market Deterioration, Hidden Labor Market Realities

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

B. Debt Payment Dynamics

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition

X. Crowding Out Effect and Interest Rate Pressures

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

XIII. Conclusion: Fiscal Shock Watch 2025 

Is the Philippines on the Brink of a 2025 Fiscal Shock? 

April's budget surplus masks a deeper fiscal crisis brewing beneath record-high deficits and weakening revenue collection

I. A Brewing Fiscal Storm? 

Is the Philippines teetering on the brink of a fiscal shock?  We are about to find out after eight months of government data. 

The Bureau of the Treasury’s April 2025 cash operations report confirms our suspicion that the government is struggling to meet critical fiscal targets, which should raise concerns about economic stability. 

As noted in early May: "A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track." (Prudent Investor, May 2025) 

The Inquirer.net reported on May 28, 2025: "The national government recorded a budget surplus of P67.3 billion in April, surging by 57.51 percent or P24.6 billion from a year ago, as tax revenues posted stronger growth and spending slowed for the month. However, for the January to April period, the cumulative budget deficit surged by 78.98 percent to P411.5 billion, as public spending rose by 13.57 percent to support economic activity and the priority programs of the Marcos administration." 

Media narratives either echoed the official line on tax revenue strength or highlighted spending restraint as causes for April’s surplus. But both perspectives overlook a critical detail: April’s surplus aligns not just with the 2023 VAT filing shift to a quarterly basis (previously discussed) but—more importantly—with the "annual tax filing deadline"—a period typically associated with a revenue spike. Yet, even this failed to close the fiscal gap. 

Additionally, the record-high deficits in Q1, persisting into the first four months, have gone largely unaddressed in mainstream discussions. 

To cut to the chase: April data signals a further weakening in the revenue base—right in the face of unrelenting public expenditure, pushing the deficit to historic levels. 

Let’s delve into the details to understand the scope of this fiscal challenge. 

II. April 2025 vs April 2024: A Sharp Deterioration 

In April 2025: 

• Revenues fell 2.82%
• Tax revenues grew 7.84%
• Non-tax revenues plunged 68.08%
• Bureau of Internal Revenue (BIR) growth of 11.1% boosted tax revenues
• Bureau of Customs (BoC) 7.5% declined, which weighed on overall performance

Compare that to April 2024: 

• Revenues soared 21.9%
• Tax revenues surged 13.9%
• Non-tax revenues rocketed 114%
• Tax revenues were anchored by BIR's 12.65% growth and the BoC delivered a strong 19.5%.

Clearly, April 2025 showed a sharp drop in performance despite the same structural advantages related to annual filings.

Figure 1       

The nominal (peso) figures show revenue collections falling significantly short of April 2024's all-time high. (Figure 1, topmost window)

Relative to the VAT’s quarterly cycle, note that the combined January and April 2025 surpluses (Php 135.66 billion) exceeded 2024’s (Php 130.7 billion) by just 3.8%—barely moving the needle against the Q1 fiscal gap. (Figure 1, second to the highest image) 

III. Four-Month Performance: Weak Revenue Momentum 

For January to April 2025: 

• Revenues grew a meager 3.3%.
• Tax revenues rose 11.5%, while non-tax revenues collapsed 51.94%.
• The BIR and BoC posted 14.5% and 2.16% growth, respectively.

In contrast, the first four months of 2024 showed:

• Revenues up 16.8%.
• Tax revenues up 13.22%.
• Non-tax revenues up 48.81%.
• The BIR and BoC grew by 15.35% and 6.47%, respectively. 

Clearly, April 2025 didn’t just underperform—it dragged down the already fragile broader four-month revenue trend. (Figure 1, second to the lowest visual) 

IV. Weak Revenue Despite Loose Conditions: A Structural Problem? 

Critically, Q1’s collection performance coincided with the full effects of the BSP’s first easing cycle in 2024, while April began reflecting partial effects of the second phase. 

Additionally, macro conditions were supportive:

• Bank credit growth was strong.
• Labor market conditions were reported as near full employment.
• Inflation slowed.

Universal-commercial bank loans jumped 11.85% in April to a record Php 12.931 trillion. Yet, public revenues stalled. (Figure 1, lowest graph) 

In short, despite historically loose financial conditions, the government has already been experiencing collection issues—a potential symptom of diminishing returns from BSP’s easy-money regime.

This suggests that further monetary stimulus yields progressively smaller positive impacts on revenue generation or economic growth, potentially reflecting inefficiencies in credit transmission due to mounting balance sheet problems. 

Which leads us to the trillion-peso question: What happens when financial conditions tighten? 

V. Budget Math: A Deficit Blowout in the Making?

From January to April, total revenues reached Php 1.520 trillion. Annualized, that projects Php 4.561 trillion—assuming average monthly intake of Php 380.06 billion. 

Compare that to the 2025 enacted budget of Php 6.326 trillion—already a base case considering six straight years of overspending. Authorities have already disbursed Php 1.932 trillion, implying a remaining monthly average of Php 549.28 billion. 

Bluntly put: At the current pace, 2025 could register a deficit of Php 1.765 trillion—5.7% higher than 2021’s all-time high of Php 1.67 trillion!

The key difference? 2021’s deficit was a deliberate fiscal stabilizer—alongside the BSP's unprecedented monetary and regulatory measures—in response to the pandemic. 

In 2025, no downturn has yet emerged—but the deficit itself threatens to trigger one.

VI. Economic Fragility Threatens Further Revenue Weakness 

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

Figure 2

Since its peak in July 2024, manufacturing loans have been decelerating. March growth was just 2%. However, PPI rose only 0.06% in April YoY—barely moving. (Figure 2, topmost pane)

Though manufacturing volume/value both rose 4.2–4.3% inApril, this likely reflected distortions from new Trump tariffs effective that month.

The S&P PMI index showed a similar spike to 53 in April but slumped to 50 in May. (Figure 2, second to the highest chart)

B. External Trade: Consumer Import Growth Sharply Slows

April imports fell 7.2%, while exports rose 7%, compressing the trade deficit by 26%. (Figure 2, second to the lowest diagram)

But consumer goods imports slumped from 25.8% in March to just 2.83% in April. (Figure 2, lowest graph)

Agri-based products—led by coconut and sugar—boosted exports.

C. Headline and Core CPI: More Evidence of Demand Weakness

Headline CPI slipped from 1.4% in April to 1.3% in May, mainly due to quasi-price controls known as Maximum Suggested Retail Prices (MSRP) on rice and pork. The government also began rolling out Php 20 rice subsidies in select areas, distributing them among targeted groups.

Figure 3

However, Core CPI (non-food and non-energy) steadied at 2.2% for a third straight month, backed by a base-forming month-over-month rate of 0.16%—marking a second consecutive month. A soft CORE CPI reflects underlying weakness in demand. (Figure 3, topmost image)

D. Labor Market Deterioration, Hidden Labor Market Realities

Labor data reveals further vulnerabilities. The unemployment rate rose from 3.9% in March to 4.1% in April, but this excludes an estimated 24 million “functionally illiterate workers” (47% of the labor force or 30% of the population aged 15 and above). Many of these workers are likely employed in the informal sector or MSMEs (67% of employment in 2023, per DTI) or are underemployed, part-time, or not in the labor force. 

The “not in the labor force” population, defined by the PSA as those not seeking work due to reasons like housekeeping or schooling or permanent disability, has risen since November 2022, potentially masking the true unemployment rate and raises questions about the true extent of labor underutilization. (Figure 3, middle chart) 

The correlation between universal-commercial bank consumer salary loans and CPI trend since 2021 highlights consumer strain, further eroding aggregate demand. (Figure 3, lowest diagram) 

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain 

Amidst all of this, we must ask: what has happened to "aggregate demand," particularly consumer demand? If consumers have shown worsening strains at the start of Q2, its continuity bodes ill for GDP growth and could likely be expressed in potential shortfalls in tax collections. 

So how will the government attempt to keep the GDP afloat? Given their top-down bias, the mechanical recourse would be to front-load public spending, thereby heightening the risks of a fiscal deficit blowout! 

Naturally, because the government is not a wealth generator but rather a redistributor and consumer, someone has to finance that swelling deficit. That "someone" is the individuals in the wealth-generating productive private sector. 

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

Figure 4 

With the first four-month deficit at a record high of Php 411.5 billion, authorities raised Php 155.61 billion in April, leading to a 190% spike in financing of Php 799.73 billion in 2025. This effectively reversed the three-year (2021-2024) decline previously hailed by mainstream experts as prudential management. (Figure 4, topmost window)

The financing surge increased BTr's cash reserves to Php 1.205 trillion (Jan-Apr), though authorities held net cash reserves of only Php 188.9 billion in April. 

April's financing was mostly acquired through domestic issuance.

B. Debt Payment Dynamics 

April debt payments soared 73.72% to Php 280.898 billion, accruing to Php 622.921 billion in the first four months of 2025. (Figure 4, middle image) 

Total debt payments remained 45.7% below 2024's record levels. However, FX payments grew 17.3%, partly offsetting the 59.64% plunge in peso payments.

The FX share of debt servicing relative to the total has been rising since 2024. (Figure 4, lowest chart) 

The lag in payment data may be due to scheduling issues or information deliberately withheld for political reasons. 

While we find the preponderance of media announcements showing how debt payment has substantially slowed this year rather amusing, logic dictates that widening deficits will lead to a critical increase in debt that will have to be serviced over time. 

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition 

April debt hit a record Php 16.753 trillion. Thanks to a strong peso, FX-denominated loans fell 2.7% or Php 142.33 billion. 

Per Bureau of Treasury (BTr): "The reduction was primarily due to the P124.74 billion decrease in the peso value of external debt owing to peso appreciation." 

However, domestic debt grew 1.85% or Php 211 billion, resulting in a net increase of 0.41% or Php 68.690 billion. 

Reality Check: Philippine foreign debt did not actually shrink. The peso simply strengthened, lowering the debt's peso equivalent. Remember, FX liabilities still have to be repaid in dollars or other foreign currencies. In short, it's a revaluation trick—a statistical façade, not a real debt decrease. 

X. Crowding Out Effect and Interest Rate Pressures

Figure 5

In any case, the widening deficit, brought about by the mismatch between accelerating public spending and weakening revenue growth, underwrites the escalation of public debt. The rise in public debt has already been outpacing the growth trend of public spending, driven by the deficit and likely by amortization requirements. (Figure 5, topmost pane)

This escalating fiscal deficit means that competition for access to the public's diminishing savings will intensify, as government requirements will likely crowd out the domestic credit needs of banks and non-private sector firms, thereby putting pressure on interest rates. For businesses, this translates to higher borrowing costs and reduced access to credit, potentially stifling private sector investment and job creation. For ordinary citizens, it could mean higher interest rates on loans for homes, cars, or personal consumption. 

As an aside, the relentless rise in debt levels is not only a manifestation of the consequences of the government-BSP's "trickle-down" policies (debt-financed "savings-investment gap," "twin deficits," and "build and they will come" malinvestments); critically, they also signify the indirect ramifications of the Philippine social democratic system. In essence, this is what you have voted for! 

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing 

So, despite authorities' earnest attempts to push down the CPI—mainly via price controls or Maximum Suggested Retail Prices (MSRP) for rice and pork—to accommodate a desired easing cycle, T-bill rates have barely budged since 2022!  (Figure 5, middle chart) 

T-bills, the most sensitive to BSP's rate cuts, have remained unresponsive to April's CPI data! 

The widening spread between market (T-bills) and the CPI suggests that, aside from the crowding-out effect, Treasury markets view the present disinflation as "transitory," or they are hardly convinced of the integrity of the government's data. 

Consider this: The punditry consensus has been clamoring for lower rates on the back of a slumping CPI, but treasury dealers for their companies continue to price Treasuries as if the CPI remains inordinately high!

In short, the crowding out has rendered the government-BSP's easing cycle ineffective: Fiscal stimulus has hit a wall due to diminishing returns!

At worst, the mounting discrepancy could translate into increasing policy risks—or a potential blowback—that could be expressed through an inflation surge or a USD/PHP spike.

As seen in banks' balance sheets, this crowding out has led to a plunge in their liquidity positions (evidenced by falling cash-to-deposits and liquid assets-to-deposits ratios).

This increasing demand for public savings also applies to foreign exchange (FX) requirements. This means that to meet the economy's foreign exchange (FX) requirements and support the BSP's "soft peg" or foreign exchange policy, a surge in external debt can be expected. 

Evidently, public savings have not been sufficient. Authorities have increasingly relied on banks to finance public requirements via net claims on the central government (NCoCG), which have been rising in tandem with public debt. These assets have been siloed via banks' held-to-maturity (HTM) assets. The all-time high in public debt has been accompanied by a near-record NCoCG in April. (Figure 5, lowest diagram)

Figure 6

It is unsurprising that trades in government securities have been booming, even as 10-year yields have been on an uptrend. (Figure 6, topmost diagram) 

This phenomenon suggests two things: potential disguised losses in banks and financial institutions, and second, that these trades have crowded out trading activities in the Philippine Stock Exchange (PSE). 

In 2020, the BSP's historic Php 2.3 trillion intervention occurred partly via its own NCoCG, which is conventionally known as "quantitative easing." Although the present economy has supposedly ‘normalized,” the BSP's NCoCG remains at 2020 levels. This can be expected to surge when public savings and banks' capacity have reached their maximum. (Figure 6, middle image) 

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time. 

We doubt if they can maintain the USD/PHP peg or if they would accommodate a limited peso devaluation. 

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

With this in mind, we can expect both public debt and debt servicing to experience an accelerated rise. Public debt to GDP could hit 2003-2004 levels, while debt servicing should see an equivalent uptrend over the coming years. (Figure 6, lowest chart) 

We should not forget: rising public debt inevitably leads to higher debt servicing, which in turn necessitates more public spending. 

As noted last May 

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

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

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

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

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

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

Following this, after grappling with debt and inflation, the government is bound to raise taxes. 

XIII. Conclusion: Fiscal Shock Watch 2025 

Unless BSP’s easing gains real economic traction, the first four months of 2025 point to a growing likelihood of a fiscal shock. 

• Revenue collection has deteriorated.
• Economic indicators signal fragility.
• Consumers are heavily indebted and weakening.
• External pressures—Trump's tariffs, deglobalization, and the re-emergence of "bond vigilantes" (investors who sell off government bonds when they believe fiscal policies are unsustainable, thus driving up borrowing costs for the government) could tighten external liquidity and worsen domestic financial conditions. 

Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026. 

If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate.

___

References 

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

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

 

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

 

A country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power—Charles Calomiris and Stephen Haber

In this issue

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut

II. The Primary Beneficiaries of BSP’s Policies

III. The Impact of the BSP Monetary Policy Rates on MSMEs

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

V. Logical Contradictions in the Philippine Banking Data

VI. Slowing Bank Asset Growth

VII. Booming Bank Lending—Magnified by the Easing Cycle

VIII. Economic Paradoxes from the BSP’s Easing Cycle

IX. Plateauing Investments and Rising Losses

X. Mounting Liquidity Challenges in the Banking System

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost? 

As part of its ongoing easing cycle, the BSP cut rates for the fourth time in April 2025. The key question: who benefits? Clues point to trickle-down policies at work. 

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut 

The Bangko Sentral ng Pilipinas (BSP) initiated its easing cycle in the second half of 2024, implementing three rate cuts and reducing the banking system’s Reserve Requirement Ratio (RRR) in October 2024. 

This was followed by a second RRR reduction in March 2025, complemented by the doubling of deposit insurance by the Philippine Deposit Insurance Corporation (PDIC), a BSP-affiliated agency, in the same month. 

The latter was likely intended to boost depositor confidence in the banking system, given the rapid decline in banks’ reserves amid heightened lending and liquidity pressures. (previously discussed) 

Last week, the BSP announced its fourth rate cut—the first for 2025—bringing the policy rate to 5.5%. 

The BSP justified this latest cut by citing the easing of inflation risks and a "more challenging external environment, which could dampen global GDP growth and pose downside risks to domestic economic activity." 

But who truly benefits from these policies? 

Or, we ask: Cui bono? 

The answer naturally points to the largest borrowers: the Philippine government, elite-owned conglomerates, and the banking system. 

Let’s examine the beneficiaries and question whether the broader economy is truly being served. 

II. The Primary Beneficiaries of BSP’s Policies 

The BSP’s easing measures disproportionately favor the following:

Figure 1

A. The Philippine Government: Public debt surged by Php 319.26 billion to a record PHP 16.632 trillion in February 2025.  Debt-to-GDP ratio increased to 60.72% in 2024, up from 60.1% in 2023. (Figure 1, topmost image) 

While debt servicing data for the first two months of 2025 appears subdued, it accounted for 7.64% of nominal GDP in 2024—a steady increase from its 2017 low of 4.11%. Between 2022 and 2024, the debt servicing-to-GDP ratio accelerated from 5.87% to 7.64%, reflecting the growing burden of rising debt.

Lower interest rates directly reduce the government’s borrowing costs, providing fiscal relief at a time of record-high debt, but they also encourage more debt-financed spending, a key factor contributing to this all-time high.

B. Elite-Owned Conglomerates: Major corporations controlled by the country’s elites have also seen their debt levels soar. 

For instance, San Miguel Corporation’s 2024 debt increased by Php 154.535 billion to a record Php 1.56 trillion, while Ayala Corporation’s debt rose by PHP 76.92 billion to PHP 666.76 billion. 

Other member firms of the PSEi 30 have yet to release their annual reports, but Q3 2024 data shows that the non-financial debt of the PSEi 30 companies grew by Php 208 billion, or 3.92%, to PHP 5.52 trillion—equivalent to 16.6% of Total Financial Resources (Q3).

These conglomerates benefit from lower borrowing costs, enabling them to refinance existing debt or fund expansion at cheaper rates, but similar to the government, their mounting loan exposure diverts financial resources away from the rest of the economy, exacerbating credit constraints for smaller firms. 

C. The Philippine Banking System: The banking sector itself is a significant beneficiary. 

In February 2025, aggregate bonds and bills payable surged by Php 560.2 billion—the fourth-highest increase on record—pushing outstanding bank borrowings to PHP 1.776 trillion, the second-highest level ever, just below January 2025’s all-time high of PHP 1.78 trillion. (Figure 1, middle pane)

Ideally, lower rates and RRR cuts provide banks with cheaper funding and more lendable funds, boosting their profitability while easing liquidity pressures. But have they? 

These figures reveal the primary beneficiaries of the BSP’s policies: the government, elite conglomerates, and the banking system.

III. The Impact of the BSP Monetary Policy Rates on MSMEs

But what about the broader economy, particularly the micro, small, and medium enterprises (MSMEs) that form its backbone?

Republic Act 9501, the Magna Carta for MSMEs, mandates that banks allocate at least 8% of their total loan portfolio to micro and small enterprises (MSEs) and 2% to medium enterprises (MEs), based on their balance sheets from the previous quarter.

However, a recent report by Foxmont Capital Partners and Boston Consulting Group (BCG), cited by BusinessWorld, highlights a stark mismatch: despite MSMEs comprising 99.6% of all businesses in the Philippines, generating 67% of total employment, and contributing up to 40% of GDP, they accounted for only 4.1% of total bank lending in 2023—a sharp decline from 8% in 2010.

As of Q3 2024, the BSP reported a total compliance rate with the Magna Carta for MSMEs stood at just 4.6%. (Figure 1, lower graph)

Despite a boom in bank lending, many banks opt to pay penalties for non-compliance rather than extend credit to MSMEs.

This underscores a harsh reality: bank lending remains concentrated among a select few—large corporations and the government—while MSMEs continue to be underserved.

All told, the BSP's policies have minimal impact on MSMEs, highlighting their distortive distributional effects

The report further echoes a "trickle-down" monetary policy critique we’ve long emphasized: the Philippine banking system is increasingly concentrated. Over 90% of banking assets are held by just 20 large banks, while more than 1,800 smaller institutions, primarily serving rural areas, collectively control only 9% of total assets!

Figure 2

This concentration is evident in the universal and commercial banks’ share of total financial resources, which stood at 77.7% in January 2025, slightly down from a historic high of 77.9% in December 2024. (Figure 2, topmost diagram)

If the BSP’s policies primarily benefit the government, banks, and elite conglomerates rather than the broader economy, why is the central bank pushing so hard to continue its easing cycle? And what have been the effects of its previous measures?

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

One of the BSP’s stated reasons for the April 2025 rate cut was a decline in the Consumer Price Index (CPI), with March headline CPI at 1.8%.

However, authorities have done little to explain to the public the critical role that Maximum Suggested Retail Prices (MSRPs)—essentially price controls—played in shaping this decline.

First, the government imposed MSRPs on imported rice on January 20, 2025, despite rice prices already contracting by 2.3% that month. (Figure 2 middle chart)

The second phase of rice MSRPs was implemented on March 31, despite rice prices deflating.

Second, pork MSRPs were introduced on March 10, 2025.

Pork inflation, which peaked at 8.5% in February, slipped to 8.2% in March, despite a reported compliance rate of only 25% in the National Capital Region (NCR).

Notably, pork sold in supermarkets and hypermarkets was exempt from these controls, revealing an inherent bias of policymakers against MSMEs. Were authorities acting as tacit sales agents for the former?

Third, since the introduction of these quasi-price controls, headline CPI has declined faster than core CPI (which excludes volatile food and energy prices), which printed 2.2% in March. (Figure 2, lowest window)

Food CPI, with a 34.78% weighting in the CPI basket, has likely been a significant driver of this decline, more so than core CPI.

This divergence suggests that price controls artificially suppressed headline inflation, masking underlying price pressures.

Meanwhile, the falling core CPI points to weak consumer demand, a concerning trend given the Philippines’ near-record employment rates.

Figure 3

Finally, the Philippine treasury market appears to challenge the BSP’s narrative of controlled inflation at 1.8% in March 2025.

Yield data shows a subtle flattening in the mid-to-long section of the curve: yields for 2- to 5-year maturities dipped slightly (e.g., the 5-year yield fell by 2.8 basis points from February 28 to March 31), while the 10-year yield rose by 6.75 basis points, and long-term yields, such as the 25-year, declined by 3.15 basis points. (Figure 3, topmost image)

This flattening—driven by a narrowing spread between medium- and long-term yields—may reflect market concerns about economic growth and banking system liquidity.

Despite this, the overall yield curve remains steep last March, signaling that the market anticipates inflation risks in the future.

This suggests that Treasury investors doubt the sustainability of the BSP’s inflation management.

We suspect that authorities leveraged price controls to justify the rate cut, using the suppressed CPI as a convenient metric rather than a true reflection of economic conditions.

This raises questions about the BSP’s transparency and the real motivations behind its easing cycle.

V. Logical Contradictions in the Philippine Banking Data

When you make a successful lending transaction, you get back not only your capital but the interest with it. Less costs, this income represents your profits and adds to your liquidity (savings or capital).

When you make a successful investment transaction, you get back not only your capital but the dividend or capital gains with it. Less costs, this income also represents your profits and adds to your liquidity (savings or capital).

Applied to the banking system, under these ideal circumstances, declared profits should align with liquidity conditions, but why does this depart from this premise?

Let us dig into the details. 

VI. Slowing Bank Asset Growth 

Bank total assets grew by 8% year-over-year (YoY) in February 2025 to PHP 26.95 trillion, slightly below December 2024’s historic high of PHP 27.4 trillion.  (Figure 3, middle pane)

Despite the BSP’s easing cycle, the growth in bank assets has been slowing, a downtrend that has persisted since 2013. This decline in the growth of bank assets has mirrored the falling share of cash reserves.

The changes in the share distribution of assets illustrate the structural evolution of the Philippine banking system.

As of February 2025, lending, investments, and cash represented the largest share, totaling 92.6%, broken down into 54.5%, 28.8%, and 8.8%, respectively. (Figure 3, lowest visual)

Since 2013, the share of cash reserves has been declining, bank loans broke out of their consolidation phase in July 2024 (pre-easing cycle), while the investment share appears to be peaking.

VII. Booming Bank Lending—Magnified by the Easing Cycle

The Total Loan Portfolio (inclusive of Interbank Loans (IBL) and Reverse Repurchase Agreements (RRP)) grew by 12.3% in February 2025, slightly down from 13.7% in January.

Since the BSP’s historic rescue during the pandemic recession, bank lending growth has been surging, regardless of interest rate and Reserve Requirement Ratio (RRR) levels. The recent interest rate and RRR cuts have only amplified these developments.

Figure 4

Notably, bank lending growth has become structurally focused on consumer lending, with the Universal-Commercial share of consumer loans rising to an all-time high as of February 2025. (Figure 4, topmost graph)

This shift is partly due to credit card subsidies introduced during the pandemic recession. This evolution in the banks’ business model also points to an inherent proclivity toward structural inflation: producers are receiving less financing (leading to reduced production and more imports), while consumers have been supplementing their purchasing power, likely to keep up with cumulative inflation.

In short, this strategic shift toward consumption lending underlines the axiom of "too much money chasing too few goods."

The rising loan-to-deposit ratio further shows that bank lending has not only outperformed asset growth, but ironically, these loans have not translated into deposits. (Figure 4, middle chart)

Total deposit liabilities growth slowed from 6.83% in January to 5.6% in February, driven by a slowdown in peso deposits (from 6.97% to 6.3%) and a sharp plunge in foreign exchange (FX) deposit growth (from 6.14% to 2.84%). (Figure 4, lowest window)

Peso deposits accounted for 82.7% of total deposit liabilities. Ironically, despite the USD-PHP exchange rate drifting near the BSP’s ‘upper band limit’ or its ‘Maginot Line’, FX deposit growth has materially slowed.

VIII. Economic Paradoxes from the BSP’s Easing Cycle 

Paradoxically, despite near-record employment levels (96.2% as of February 2025) and stratospheric loan growth propelled by consumers, the GDP has been stalling, with Q3 and Q4 2024 underperforming at 5.2% and 5.3%, respectively.

Real estate vacancies have been soaring—even the most optimistic analysts acknowledge this—and Core CPI has been plunging (2.2% in March 2025, as mentioned above).

Figure 5

Meanwhile, social indicators paint a grim picture: SWS hunger rates in March have hit near-pandemic milestones, and self-rated poverty, affecting 52% of families, has rebounded in March after dropping in January 2025 to 50% from a 21-year high of 63% recorded in December 2024. (Figure 5, topmost image) 

In a nutshell, where has all the fiat money created via loans flowed? What is the black hole consuming these supposedly profitable undertakings? 

IX. Plateauing Investments and Rising Losses 

The plateauing of investments is highlighted by their slowing growth rates. 

Total Investments (Net) decelerated from 5.85% in January to 4.86% in February 2025. This slowdown comes in the face of elevated market losses, which remained at PHP 26.4 billion in February, down from PHP 38.1 billion a month ago. (Figure 5, middle diagram) 

Held-to-Maturity (HTM) securities accounted for the largest share of Total Investments at 52.22%, followed by Available-for-Sale (AFS) securities at 38.5%, and Financial Assets Held for Trading (HFT) at 5.6%. 

Despite the CPI’s sharp decline, backed by the BSP’s easing, elevated Treasury rates—such as the 25-year yield at 6.3%—combined with losses in trading positions at the PSE (despite coordinated buying by the "national team" which likely includes some banks—to prop up the PSEi 30 index) have led to losses in banks’ trading accounts. 

Clearly, this is one reason behind the BSP’s easing cycle.

Yet, HTM securities remain the largest source of bank investments.

In early March 2025, we warned that the spike in banks’ funding of the government via Net Claims on Central Government (NCoCG) would filter into HTM assets: 

"Valued at amortized cost, HTM securities mask unrealized losses, potentially straining liquidity. Overexposure to long-duration HTMs amplifies these risks, while rising government debt holdings heighten banks’ sensitivity to sovereign risk. 

With NCoCG at a record high, this tells us that banks' HTMs are about to carve out another fresh milestone in the near future. 

In short, losses from market placements and ballooning HTMs have offset the liquidity surge from a lending boom, undermining the BSP’s easing efforts." (Prudent Investor, March 2025)

Indeed, the NCoCG spike to a record PHP 5.54 trillion in December 2024 pushed banks’ HTM holdings above their previous high of PHP 4.017 trillion in October 2023, breaking the implicit two-year ceiling of PHP 4 trillion to set a fresh record of PHP 4.051 trillion in February 2025. (Figure 5, lowest pane) 

This increase raised the HTM share of assets from 14.7% in January to 15.03% in February. 

X. Mounting Liquidity Challenges in the Banking System

Figure 6

This new all-time high in HTM securities led to a fresh all-time low in the cash-to-deposit ratio, meaning that despite the RRR cuts, cash reserves dropped more than the slowdown in deposit growth would suggest. (Figure 6, topmost chart)

The banking system’s cash and due from banks fell 2.94% in February to PHP 2.37 trillion, its lowest level since June 2019, effectively erasing all of the BSP’s unprecedented PHP 2.3 trillion cash injection in 2020-21. (Figure 6, middle graph)

Moreover, the liquid assets-to-deposits ratio, another bank liquidity indicator, dropped to June 2020 levels. (Figure 6, lowest visual)

The BSP cut the RRR in October 2024, yet liquidity challenges continue to mount. What, then, will the March 2025 RRR cut achieve? While the BSP notes that bank credit delinquency measures—such as gross non-performing loans (NPLs), net NPLs, and distressed assets—have remained stable, it’s doubtful that HTM securities are the sole contributor to the liquidity challenges faced by the banking system.

Improving mark-to-market losses are part of the story, but with record credit expansion (in pesos) and an all-time high in financial leverage amid a slowing GDP, it’s likely that the banks’ unpublished NPLs are another factor involved.

Figure 7

Additionally, banks have increasingly relied on borrowing, with bills payable accounting for 67% of their outstanding debt. (Figure 7, upper graph)

Though banks have reduced their repo exposure with the BSP, interbank repos set a record high in February 2025, providing further signs of liquidity strains. (Figure 7, lower chart)

Banks have been aggressively lending, particularly to high-risk sectors such as consumers, real estate, and trade, to raise liquidity to fund the government.

However, this has led to a build-up of HTM securities and sustained mark-to-market losses for HFT and AFS assets.

Additionally, lending to high-risk sectors like consumers and real estate increases the risk of defaults, particularly in a slowing economy, which can strain liquidity if these loans become non-performing.

Moreover, this lending exacerbates maturity mismatches—for instance, when short-term deposits are used to fund longer-term real estate loans—amplifying the liquidity challenges as banks face immediate funding demands with potentially impaired assets.

While the BSP’s “relief measures” may understate the true risk exposures of the industry, the mounting liquidity challenges and the increasing scale and frequency of their combined easing policies have provided clues about the extent of these risks.

Borrowing from our conclusion in March 2025:

"The BSP’s easing cycle has fueled a lending boom, masked NPL risks, and propped up government debt holdings, yet liquidity remains elusive. Cash reserves are shrinking, deposit growth is faltering, and banks are borrowing heavily to stay afloat.

...

As contradictions mount, a critical question persists: can this stealth loose financial environment sustain itself, or is it a prelude to a deeper crisis?" (Prudent Investor March 2025)

Under these conditions, the true beneficiaries of the BSP’s easing cycle become clear: it is primarily a rescue of the elite owned-banking system. 

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

The BSP has used inflation and external challenges to justify its fourth rate cut in April 2025, part of an easing cycle that began in the second half of 2024. 

The sharp decline in the March CPI rate to 1.8%—potentially understated due to price controls through Maximum Suggested Retail Prices (MSRPs)—may have provided a convenient rationale. 

However, the data suggests a different story: increasing leverage in the public sector, elite firms, and the banking system appears to be the real driver behind the BSP’s easing cycle, which also includes RRR reductions and the PDIC’s doubling of deposit insurance. 

The evidence points to a banking system under strain—record-low cash reserves, a lending boom that fails to translate into deposits, and economic paradoxes like stalling GDP growth despite near-record employment. 

When the BSP cites a "more challenging external environment, which would dampen global GDP growth and pose a downside risk to domestic economic activity," it is really more concerned about the impact on the government’s fiscal conditions, the health of the elite-owned banking system, and elite-owned, too-big-to-fail corporations. 

This focus comes at the expense of the broader economy, as MSMEs remain underserved and systemic risks, such as unpublished NPLs and overexposure to government debt, continue to mount. 

As the BSP prioritizes a rescue mission for its favored few, one must ask: at what cost to the Philippine economy, and can this trajectory avoid a deeper crisis?

 

 

 

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

Monetary pumping and government spending cannot remove the dependence of demand on the production of goods. On the contrary, loose fiscal and monetary policies impoverish real wealth generators and reduce their ability to produce goods and services, thus weakening effective demand for other goods—Dr. Frank Shostak 

In this issue

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation

VI. January’s Record Cash Spike

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso

VIII. Banks and the BSP as Fiscal Lifelines

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

January Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden 

VAT reporting changes drove January 2025’s surplus, despite slowing revenue growth, record-high interest payments, and ballooning public debt—exposing growing fiscal vulnerabilities.

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus 

Businessworld, March 21, 2025: "FINANCE Secretary Ralph G. Recto said the budget surplus recorded in January is unlikely to continue in the following months. Asked if the surplus will be sustained in the runup to the elections, Mr. Recto told BusinessWorld: “No. Our deficit target this year is 5.3% of the GDP (gross domestic product).”" 

It’s remarkable how media portrays government fiscal management as though it’s a model of efficiency and foresight. 

This supposedly impartial business outlet echoes the optimism with little scrutiny, displaying a certain undue enthusiasm in their narrative. 

-The “manageable” budget? Public outlays continue to grow, often exceeding the allocations set by Congress. 

-Revenues? These are presented as if they align seamlessly with the government’s projections—reality, it seems, is expected to comply. 

-Changes to VAT reporting? The January surplus was largely a result of this adjustment that took effect in 2023. As a media outlet, they should have recognized this. Instead, the omission conveniently aligns with their theme of unquestioning deference. 

-And the political context of deficit spending? It’s treated as a non-issue, as though public resources are always managed with the utmost prudence and altruism. Yet, this framing sidesteps how deficit spending often fuels projects with short-term appeal but long-term consequences. 

Underlying all this is the assumption that the government is all-knowing, omnipotent, and in perfect command of the economy—a notion more fictional than factual. 

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023 

Let us dive into the details. 

Back in September, we noted: "So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter."  (Prudent Investor, 2024) 

The changes in VAT reporting took effect on January 1, 2023. 

Though expenditures grew by 19.45%, outpacing revenues’ 10.75% increase, in peso terms, January 2025 revenues exceeded outlays, leading to the month’s surplus.         

Revenues of Php 467.15 billion marked the third-largest monthly total in pesos, following April and October 2024.

Figure 1 

Meanwhile, expenditures were the smallest monthly amount since February 2024. Nevertheless, the long-term spending and revenue trends remain intact so far. (Figure 1, upper window) 

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion 

However, despite the revenue outperformance—driven by tax collections—growth rates materially declined in January 2025. Total tax and Bureau of Internal Revenue (BIR) collection growth slowed from 25.03% and 31.35% in 2024 to 13.6% and 15.13% in 2025, respectively.  (Figure 1, lower graph) 

On the other hand, Bureau of Customs (BoC) collections jumped from 3.98% to 7.98% in 2025. Since BIR accounted for 81.2% of the total, tax revenues largely reflected its growth rate.

Figure 2

And this slowdown in revenue growth is occurring alongside record-breaking bank credit expansion! Universal commercial banks reported a 13.3% surge in bank lending growth—the highest rate since December 2020—reaching Php 12.7 trillion in January, slightly below December 2024's record. (Figure 2, upper image)

In a nutshell, the decelerating revenue growth reflects the diminishing returns of the Marcos-nomics fiscal stimulus.

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

The quarterly shift in VAT reporting resulted in a Php 68.4 billion surplus, the third largest after January 2024 and April 2019. (Figure 2, lower chart)

Although public spending may have appeared subdued in January, the government has an enacted 2025 budget of Php 6.326 trillion, averaging Php 527.2 billion monthly.

Figure 3

Yet, the Executive branch has hardly been frugal—it has consistently outspent legislated allocations since 2016! (Figure 3, upper visual)

If spending, which they have the power to control, cannot be managed, then revenues—being dependent on spontaneous economic and financial interactions—are even less controllable. 

This persistent spending overreach signals an implicit yet pivotal shift in the distribution of political power. As we noted earlier: "More importantly, this repeated breach of the "enacted budget" signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025) 

This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending. 

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation 

January 2025 interest payments (IP) soared to a record Php 104.4 billion, pushing their share of total expenditures to 26.2%—a peak last seen in 2009! (Figure 3, lower diagram) 

Authorities attributed this to a "shift in coupon payment timing due to the issuance strategy of multiple re-offerings of treasury bonds," as well as "an earlier servicing of a Global Bond with a February 1 coupon date falling on a weekend." 

Nonetheless, the programmed budget for interest payments in 2025 is Php 848 billion. January’s interest payment equates to 12% of this total 2025 allocation for interest payments, while 26.2% represents its share of January’s total expenditures. 

Interest payments and overall debt servicing data in the coming months will shed light on the true conditions. 

Once again, as we noted earlier: "Government spending will increasingly be diverted toward debt payments or rising debt service costs constrain fiscal flexibility, leaving fewer resources for essential public investments" (Prudent Investor, March 2025) 

VI. January’s Record Cash Spike 

Figure 4

Another striking figure in the government’s cash operations report was the January cash balance surplus, which soared to an all-time high of Php 1.23 trillion, despite reported financing of only Php 211 billion. (Figure 4, topmost pane) 

The Bureau of Treasury (BoTr) reported cash flow deficits of Php 104 billion, Php 261 billion, and Php 370.04 billion in the last three months of 2024, totaling Php 735 billion. The BoTr offered no explanation for this discrepancy. One plausible reason could be the USD 3.3 billion ROP Global bond issuance. 

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso 

During the same period, public debt rose by Php 261.5 billion month-on-month (MoM) or Php 1.134 trillion year-on-year (YoY) to a record Php 16.313 trillion in January.  (Figure 4, middle graph) 

Authorities are programmed to borrow Php 2.545 trillion in 2025, slightly down from Php 2.57 trillion in 2024. 

Yet, outpacing domestic debt growth of 10.3%, external borrowings rose 13% in January, with their share of the total reaching 32.05%—nearly matching November’s 32.13% and reverting to 2020 levels. (Figure 4, lower image) 

Since 2020, reliance on foreign exchange (FX) borrowings has steadily increased. 

Greater dependence on FX financing raises internal pressure for the Philippine peso to devalue. As we have previously explained, the widening credit-financed savings-investment gap (SIG)—a key element of the structural economic model pursued by authorities—has resulted in persistent 'twin deficits,' which has been magnified by the pandemic era. 

Consequently, it is unsurprising that the upper limit of the USD-PHP ‘soft peg’ continues to be tested by mounting liabilities. The government is increasingly resorting to Hyman Minsky’s "Ponzi Finance"—as organic fund flows decline, reliance on debt refinancing to manage the balance sheet deepens. 

VIII. Banks and the BSP as Fiscal Lifelines

Figure 5

Banks remain a primary source of government financing, with Net Claims on Central Government (NCoCG) up 7.42% YoY to Php 5.409 trillion, though slightly down from December’s all-time high of Php 5.541 trillion. (Figure 5, upper window) 

The Bangko Sentral ng Pilipinas (BSP) is another source. January’s spending decline mirrored the BSP’s NCoCG, which rose 14.54% YoY to Php 390.3 billion but fell 34% MoM from December’s Php 590 billion. The fluctuations in BSP’s NCoCG have closely tracked public spending, with correlations tightening since its historic rescue of the banking system. (Figure 5, lower graph) 

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP 

Figure 6

Weak demand, potentially exacerbated by lower public spending in January, contributed to the decline in Core CPI, with non-food and energy inflation falling from 2.6% in January to 2.4% in February 2025. (Figure 6, upper diagram) 

It is worth reiterating that record public spending in Q4 2024 accompanied just 5.2% GDP growth—evidence of the crowding-out syndrome in action. (Figure 6, lower chart) 

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

The January 2025 surplus is a fleeting anomaly rather than a sign of sustainable fiscal health. The underlying trends—slowing revenue growth, surging debt servicing costs, and increasing reliance on external borrowings—paint a concerning picture of fiscal vulnerabilities, with long-term consequences for economic stability and growth. 

Given that politics often relies on path-dependent economic policies, meaningful reforms are unlikely to occur until they are forced upon the government by market pressures. 

The BSP’s easing cycle, characterized by cuts in interest rates and the Reserve Requirement Ratio (RRR), further underscores this dynamic. These measures effectively accommodate the government’s borrowing-and-spending cycle, exacerbating fiscal imbalances and delaying necessary structural reforms. 

Or, the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis. 

____

References 

Prudent Investor Newsletters, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024 

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