The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy

 

Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly—Nassim Nicholas Taleb 

In this issue 

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy 

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!

II. What the RPT Relief Confirms; The Four Phase Bailout Template

III. Phase 1 — Transactional relief: Chromite–San Miguel deal

IV. Phase 2 — RPT Cut: The Regulatory Relief

V. Phase 3 — Financial System Backstopping

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase

VII. Phase 4 — Political Resolution: Socialization

VIII. Phase 4a – Socialization vs. Forced Liberalization

IX. Why This is s Late-Cycle Phenomenon

X. Conclusion: This Episode Was Never About Electricity Prices 

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy 

The four phases of the SMC–AEV–Meralco rescue reinforce the logic of late‑cycle fragility

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry! 

In the third week of November, we noted: 

The triad of San Miguel, Aboitiz, and Meralco illustrates deepening centralization, pillared on a political–economic feedback loop.  

Major industry transactions, carried out with either administration blessing or tacit nudging, function as implicit bailouts channeled through oligarchic control. (bold original) 

That thesis was quietly confirmed weeks later. 

Buried beneath the torrent of daily headlines was a development of first-order importance.

Figure 1

GMANews, December 3, 2025: President Ferdinand Marcos Jr. has ordered the reduction and pardon of all interest and penalties on real property taxes (RPTs) levied on independent power producers (IPPs) for 2025. In a statement, Malacañang said the cut in RPT liabilities of IPPs is "to prevent defaults and economic losses that could affect electricity supply and the government’s fiscal stability." (bold added) (Figure 1, upper news clip) 

Bullseye! 

This was not a routine tax adjustment. It was an explicit admission that private-sector leverage—specifically within the power industry—had crossed into systemic risk territory. 

It bears noting that the five largest power firms by market position are San Miguel, Aboitiz Power, First Gen, PSALM, and ACEN (Mordor Intelligence, 2024). 

The sector is tightly concentrated, politically franchised, and structurally shielded from competition. 

Aggregate 9M debt for the proponents of the Batangas LNG–Ilijan–EERI triangle—the SMC–AEV–MER troika—soared 16.4% YoY, reaching a record Php 2.254 trillion. Financing charges likewise jumped 8.3% YoY, hitting Php 101.17 billion, an all-time high. (Figure 1, lower chart) 

In that same November post, we asked what this meant for 2025–2026. The answer was already embedded in the corporate balance sheets: 

• cash liquidity is tightening
• banks are approaching risk limits
• debt has become the default funding model
• headline GDP growth is increasingly sustained by inter-corporate transactions rather than productive capex
• large conglomerates are supporting one another through balance-sheet swaps 

According to the Inquirer.net, this marks the third time (2023, February 2025 and December 2025) the incumbent administration has forgiven or reduced RPT-related financial charges. That pattern matters. 

Because this bailout arc pushes leverage toward the public balance sheet, the Philippine peso becomes the pressure valve of last resort 

II. What the RPT Relief Confirms; The Four Phase Bailout Template 

This latest RPT condonation has four critical implications: 

1. Political brokerage: Confirms the deal was arranged and brokered politically—a backstop to buy time, not reform.

2. Elite rescue: The energy sector operates through de facto monopolistic political franchises; relief accrues to incumbents, not consumers.

3. Late-cycle marker: Preemptive default prevention reflects an economy drifting into business-cycle exhaustion, where failures are no longer politically tolerable.

4. Counterparty contagion: Because creditors to IPPs are also elite-controlled, counterparties will need support—expanding the bailout perimeter. 

What we are now observing is a four-phase bailout arc in the Philippine energy sector:

Transactional Relief → Regulatory Relief → Financial System Backstopping → Resolution by Socialization/Forced Liberalization. 

III. Phase 1 — Transactional relief: Chromite–San Miguel deal 

The opening move comes disguised as a "strategic partnership." 

In reality, AEV/Meralco—through Chromite Gas Holdings—absorbed San Miguel’s stressed LNG and Ilijan assets (SPPC, EERI, related industrial estate and terminal exposure). Balance-sheet pressure is eased without declaring stress; earnings volatility was suppressed, and leverage was redistributed rather than reduced—in the interim. 

This phase is intentionally ambiguous. No one calls it a rescue. There is no emergency language, no fiscal line item. The objective is clear: prevent immediate balance-sheet failure without triggering market discipline, buying time before the state is forced to intervene. 

It sets a crucial precedent—private leverage can be quietly transferred and restructured under the guise of efficiency. 

This is a classic late-cycle hallmark: defaults become politically unacceptable, but overt bailouts are still premature. 

IV. Phase 2 — RPT Cut: The Regulatory Relief 

The next phase shifts from private camouflage to public condonation. The RPT cut is decisive. 

Malacañang’s own justification—"to prevent defaults and economic losses that could affect electricity supply and fiscal stability"—reframes private leverage as a public-interest problem. That line is the SMOKING GUN! 

At this stage, the bailout is no longer implicit; it is simply reframed as stability policy. 

Fixed costs are reduced, cash flows are protected, local governments (including Special Education Fund allocations) lose revenue, and political risk is shifted from firms to the sovereign. 

Concentrated gains, distributed costs—the political rent-seeking model, public choice theory in action. 

Bluntly, profits remain privatized while costs are socialized—a political free lunch and textbook oligarchic capture.

This phase entrenches moral hazard: elites learn leverage will be accommodated, not disciplined. Smaller players and consumers are sidelined; political-economic imbalances mount, fragility escalates.

Crucially, previous rounds of subsidies have failed to repair balance sheets or deliver durable consumer relief. The evidence is clear: these measures stabilize optics, not fundamentals.

These two phases are ex-post. We now turn to the potential ex-ante stages. 

V. Phase 3 — Financial System Backstopping 

This phase is partly in process and could intensify. 

Why issue such a justification unless there is a clear and present danger? 

The fact that this is the SECOND time in 2025 that authorities have subsidized IPPs through RPTs speaks volumes about the underlying problems 

Despite the BSP’s aggressive easing cycle—rate cuts, reserve‑requirement reductions, doubled deposit insurance, and record public spending that has pushed deficits back toward pandemic levels—liquidity stress persists. This signals a supply-side balance-sheet problem, not a demand shortfall. 

The stress point is becoming unmistakable: elite-owned leverage, particularly in capital-intensive sectors like power—amid slowing growth. 

Figure 2

According to the BSP’s Depository Corporations Survey, as of October the private sector’s share of domestic claims rose to 64.7%, while the combined financial and private sector share of M3 climbed to 80.63%. In Q3, domestic claims reached 77.6% of GDP, nearly matching the pandemic highs of 77.7% in Q1 and Q4 2021. By contrast, M2 and M3 shares of GDP—though still elevated since the pandemic recession—have been slowing, a clear departure from their previous synchronous trajectory during 2006–2020. (Figure 2) 

This divergence underscores the core problem: systemic leverage has risen through domestic claims, concentrated among elite firms, yet its transmission to real economic activity has weakened. 

This is the reason for the rescue mission.

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase 

As unproductive leverage persists and economic growth slows, bank balance sheets deteriorate. Liquidity tightens, lending slows, and stress migrates from corporates to the financial system. 

The BSP will likely respond with escalating use of its pandemic playbook:

• Deepening easing: policy-rate and RRR cuts
• Implicit injections through BSP facilities.
• Explicit support: direct infusions (e.g., the Php 2.3 trillion precedent).
• Regulatory forbearance: capital relief and provisioning leniency.
• Soft-peg defense: attempts to stabilize USD/PHP. 

Yet contradictions mount.

Figure 3

Monetary easing is constrained by inflation and FX risk; tightening risks amplifying bank stress.  Domestic liquidity and external liabilities have been key drivers of the USDPHP’s rise. (Figure 3) 

As domestic claims rise without generating real-sector activity, liquidity hoarding intensifies, weakening the monetary transmission mechanism and amplifying FX vulnerability. 

The USD/PHP soft-peg becomes fragile—defense drains reserves, while abandonment risks inflation and capital flight. 

Policy enters a trap: support the system and weaken the currency, or guard the currency and fracture the system. 

Diminishing returns begin to cannibalize monetary and economic stability. 

VII. Phase 4 — Political Resolution: Socialization 

When liquidity support and regulatory masking can no longer hold, losses are formally absorbed by the state:

• Nationalization: partial or full state control of critical assets.
• Recapitalization: government injections into systemically important institutions.
• Bad-bank vehicle: a ‘Freddie Mac’–style structure to warehouse distressed assets while preserving legacy ownership. 

Losses are socialized; control is recentralized. 

The public balance sheet expands sharply while elite actors exit with preserved equity, retained assets, or negotiated upside. What began as a "strategic deal" ends as systemic capture, with nationalization the final stop in a late-cycle rescue arc. 

VIII. Phase 4a – Socialization vs. Forced Liberalization 

Late-cycle bailout arcs bifurcate. 

If the state retains fiscal and monetary capacity, losses are socialized through nationalization or resolution vehicles. If capacity is lost—via reserve depletion, inflation, or debt saturation—the system drifts toward forced liberalization. Market discipline is not restored deliberately; it re-emerges violently. 

In this scenario, incumbent protections collapse, policy support evaporates, and asset values are repriced downward. It may resemble "liberalization," but it is not reform—it is involuntary liquidation triggered by exhausted savings and unsustainable balance sheets or by unsustainable economics—resulting in disorderly transitions, and heightened political instability. 

Ideology shapes the preferred response. 

The populist embrace of social democracy, with its preference for top-down conflict resolution, skews the political response toward socialization. 

But ideology is not sovereign and cannot override economics: real savings and fiscal capacity, not preference, ultimately determines which path the cycle takes. When the state can no longer absorb fragility, liberalization is not chosen—it is imposed. 

IX. Why This is s Late-Cycle Phenomenon 

These phases occur when:

• Leverage is high.
• Political tolerance for defaults has collapsed.
• Asset extraction has run its course.
• The state becomes the residual risk holder. 

In early or mid-cycle, failure disciplines excess. 

In late cycles, failure is deferred, masked, and ultimately absorbed by the public—after market discipline has already broken down. 

X. Conclusion: This Episode Was Never About Electricity Prices 

This episode was never about electricity prices. 

The Philippine energy-sector rescue is not a single policy choice but a phased continuum: transactional camouflage, regulatory condonation, financial backstopping, and ultimately either socialization or forced liberalization. Each phase follows the same late-cycle logic—fragility is too politically costly to reveal, so it is deferred, disguised, and transferred away from the firms that created it.

What began as a "strategic partnership" now stands exposed as a systemic bailout, with the state increasingly positioned as the residual risk holder. 

This is the defining feature of a late-cycle economy: leverage is high, defaults are politically intolerable, and oligarchic control ensure that private losses migrate toward the public balance sheet. Consumers and taxpayers ultimately bear the burden. 

The real question is not whether the cycle ends in public absorption of losses, but how much fragility will be socialized before a reckoning becomes unavoidable. 

Crucially, not all late-stage bailouts climax in outright socialization. When fiscal capacity collapses—through reserve depletion, inflation pressure, or debt saturation—the path can shift toward forced liberalization or selective deregulation and privatization. 

This is not genuine reform but an involuntary unwind: protection collapses, policy support recedes, and assets are repriced downward. It looks liberal but functions as disorderly liquidation, with distributional costs shifted onto households while elites regroup. 

Ideology shapes the state’s instincts. Populist social democracy, market‑averse and reliant on top‑down resolution, leans toward socialization. Liberalization, by contrast, rests on cooperation, division of labor, property rights, and rule of law — mechanisms that can resolve conflict without central command. 

Yet ideology alone does not decide the path: fiscal capacity and real savings ultimately determine whether fragility is absorbed by the state or forced back into the market. 

Thus, the endgame bifurcates: 

1. Resolution by Socialization – nationalization, recapitalization, or bad-asset vehicles that warehouse losses while preserving incumbent control. 

2. Resolution by Forced Liberalization – selective deregulation, privatization, and asset sales driven not by ideology but by incapacity, where the state abandons protection because it can no longer sustain it. 

Both paths are late-cycle responses to the same underlying condition: systemic fragility accumulated over years of leverage, political accommodation, and institutional rent-seeking capture. 

They differ not in purpose, but in the mechanism through which risk is transferred—and in both cases, the public ultimately shoulders the cost. 

In late cycles, the currency becomes the final referendum on the system’s accumulated fragility 

Caveat emptor.

____ 

References

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025 

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025

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