Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop

 

My cynical view is that 90 percent of financial strategy is either tax minimization, regulatory arbitrage (coming up with instruments to comply with the letter of regulations while violating their spirit), or accounting charades (complying with the letter of accounting rules while disguising reality)— Arnold Kling 

In this issue

Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop 

Segment 1.0: The PSEi Debt Financed Asset Transfer Charade

1A. Debt, Not Productivity, Drives the Philippine Economy

1B. The Big Three Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers

1C. The Circular Boost: A Fragility Loop 

Segment 2.0: San Miguel Corporation — The Minsky Ponzi Finance Core

2A. Fragility in Plain Sight

2B. SMC’s Camouflage Tactics

2C. The Mirage of Liquidity

2D. Political Angle: Deals, Influence, and the Administration’s Footprint 

Segment 2.1 — Meralco: A Utility Showing Profit, But Hiding Stress

2.1A. Chromite Gas Holdings: Meralco’s New Largest Exposure

2.1B. Q3 and 9M Performance: Meralco’s Money Illusion Revenues

2.1C. GDP Mirage and Debt Surge and Asset Inflation

2.1D. What This Really Means: Meralco as the Balance-Sheet Absorber 

Segment 2.2 – AEV: Revenue Spikes as Balance-Sheet Shock Absorption

2.2A AEV’s Q3–9M: Not Evidence of Business Growth 

Segment 3.0 — The Batangas LNG–Ilijan–EERI Triangle

3.A How One Deal Created Three Balance-Sheet Miracles 

Segment 4.0: Conclusion: How Concentration Becomes Crisis: The Philippine Energy Paradox 

Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop 

SMC, Meralco, and AEV’s energy partnership reveals how asset transfers inflate profits, recycle fragility across balance sheets 

Disclaimer: This article presents an independent analysis and opinion based solely on publicly available financial reports, regulatory filings, and market data. It does not allege any unlawful conduct, nor does it assert knowledge of internal decision-making or intent by any company or individual. All interpretations reflect broader political-economic dynamics and systemic incentives rather than judgments about specific actors. Readers should treat this as an analytical commentary, not as a statement of fact regarding any wrongdoing. 

Segment 1.0: The PSEi Debt Financed Asset Transfer Charade 

1A. Debt, Not Productivity, Drives the Philippine Economy 

Debt, not productivity, is the engine of the Philippine economy. We’ve said this repeatedly, but what’s striking in 2025 is how debt growth has concentrated in just a handful of dominant companies.

Figure 1 

In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022. (Figure 1, upper window) 

The banks were not far behind. Bills payable of the four PSEi 30 banks rose Php 191.8 billion to Php 1.125 trillion. 

Meanwhile, BSP data shows bills and bonds payable across the entire banking industry climbed 9.34% YoY in September (Q3) to Php 1.861 trillion, the third highest on record. (Figure 1, lower chart) 

For clarity, let’s stick to the 26 non‑bank PSEi firms. 

Note: these figures exclude the rest of the 284 listed companies as of Q2. Because holding companies consolidate subsidiary debt, there are double counts here. And these are only published debts—some firms appear to have shifted borrowings into other liabilities or kept exposures off balance sheet. 

Even with those caveats, the Php 5.979 trillion in published PSEi non-bank debt is large enough to equal: 

• 16.8% of the Philippine financial system’s September Php 35.582 trillion in resources/assets; and
• 29.74% of the Php 20.15 trillion in nominal GDP over the first nine months. 

The Php 603.15 billion increase alone accounts for 75% of nominal GDP growth (Php 796.224 billion, or 4.96%) in the same period. 

In short, the debt of the non‑bank PSEi 30 is not just a corporate statistic—it is macro‑significant, shaping both banking dynamics and GDP itself.

1B. The Big Three Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers 

Figure 2

In January–September 2025, the top three debt expanders among the non-bank PSEi 30—Meralco [PSE:MER], San Miguel [PSE:SMC], and Aboitiz Equity Ventures [PSE:AEV]—accounted for 52.65% of the Php 603.15 billion increase. (Figure 2, table and chart) 

Meralco (MER) debt more than doubled, rising 139.4% from Php 89.147 billion to Php 213.43 billion Php (+Php 124.283 billion). 

San Miguel (SMC) debt rose 7%, adding Php 103.312B, reaching a record Php 1.581 trillion. Yes, a T-R-I-L-L-I-O-N! 

Aboitiz Equity Ventures (AEV) debt jumped 24.26%, or Php 89.945B, to Php 460.7B. 

This was not coincidence. 

The synchronized surge reflects the Meralco–Aboitiz buy-in to San Miguel’s energy assets. 

As discussed last August 

"Beneath the surface, SMC’s debt dynamics resemble quasi-Ponzi finance—borrowing Php 681 billion to repay Php 727 billion in 1H 2025, while plugging the gap with preferred share issuance and asset monetization. The latter includes the deconsolidation and valuation uplift of its residual stakes in the Ilijan power facility and Excellent Energy Resources Inc. (EERI), as well as the $3.3 billion LNG deal with Meralco and AboitizPower in Batangas. Though framed as strategic partnerships, these transactions involved asset transfers that contributed heavily to the surge in reported profits. 

"The simulacrum of deleveraging—from Php 1.56 trillion in Q4 2024 to Php 1.506 trillion in Q2/1H 2025—appears to be a product of financial engineering, not structural improvement." 

In other words, SMC’s Q2 “deleveraging” was cosmetic. 

Its debt didn’t fall because operations improved; it fell because SMC dumped assets, liabilities, and valuation gains onto Meralco and Aboitiz.

1C. The Circular Boost: A Fragility Loop 

This buyout sequence increasingly resembles an asset transfer charade:

• SMC unloads assets with embedded liabilities.
• Meralco and AEV borrow heavily to “acquire” them.

Both sides book accounting gains via fair-value adjustments, reclassification, and deconsolidation. 

• Optics improve—higher assets, higher income, stronger balance sheets.
• Substance does not—real cash flow remains weak, debt dependence accelerates, and system-wide concentration rises. 

Each company props up another’s balance sheet, recycling fragility and presenting it as growth. 

The Philippine power sector is already intensely politicized, dominated by quasi-monopolies that operate in their respective territories. Markets exist only in form; in substance, the sector functions as a pseudo-market inside an oligopolistic cage. 

Approximate generation market shares illustrate this concentration: SMC Global ~20–25%, Aboitiz Power ~23%, First Gen + EDC ~12–18%, Meralco/MGen ~7–10%, and ACEN ~5–7% (figures vary by region, fuel type, and year). 

Recent deals only deepen this centralization, reinforcing the economic and political power of these dominant players, while regulatory bottlenecks and concentrated capital ensure that true competition remains largely symbolic. 

Segment 2.0: San Miguel Corporation — The Minsky Ponzi Finance Core 

The Chromite Gas Holdings acquisition is central to understanding SMC’s 2025 numbers.

MGen acquired 60% and Aboitiz’s TNGP took 40%, giving Chromite a 67% stake in several former San Miguel Global Power (SMGP) entities. SMGP retained 33%. This was not an expansion — again, it was an asset transfer. 

Q2: The Illusion of Improvement 

This maneuver produced a dramatic one‑off effect in Q2:

• Debt dipped slightly from Php 1.511 trillion (Q1) to Php 1.504 trillion.
• Cash surged +26.5% YoY to Php 321.14 billion.
• Profits exploded +398% YoY, from Php 4.691 billion to Php 23.4 billion. 

Q3: The Underlying Reality Reappears 

But the illusion unraveled in Q3: 

• Revenues contracted –4.5% in a weak economy.
• Profits collapsed –49.5% to Php 11.9 billion.
• Cash rose again +22.4% to Php 344 billion.

Figure 3

Debt soared Php 103.312 billion YoY, Php 76.28 billion QoQ, bringing total debt to a staggering Php 1.58 trillion. (Figure 3, topmost graph, middle table) 

2A. Fragility in Plain Sight 

Even with the current the sharp rebound in SMC’s share price — whether due to benchmark-ism (potential gaming market prices by the establishment to conceal embedded fragilities) or implicit cross-ownership effects from the Chromite transaction — market cap remains below Php 180B. 

• Borrowing growth this quarter alone equaled ≈40-45% of SMC’s entire market cap (as of the third week of November). 
• Debt outstanding exceeds annual sales. 
• Debt equals 4.44% of the entire Philippine financial system’s assets. 

This is not normal corporate leverage. 

This is systemic leverage. 

2B. SMC’s Camouflage Tactics 

SMC has been masking its worsening debt structure through: 

• Preferred share issuances (debt disguised as equity), another Php 48.6 billion raised in October.
• Asset transfers involving Meralco and Aboitiz (the Chromite–Ilijan–EERI triangle)
• Aggressive fair-value reclassification and balance-sheet engineering 

All three are textbook Minsky Ponzi Finance indicators: Cash flows cannot meet obligations; survival depends on rolling over liabilities and selling assets. 

2C. The Mirage of Liquidity 

SMC reports cash reserves (Php 344 billion) rising to nearly matching short‑term debt (Php 358 billion). (Figure 3, lowest diagram) 

But internal breakdowns suggest: 

• A portion of “cash” is restricted
• Some is pledged to lenders
• Some sits inside joint ventures 

Balance-sheet “cash” includes mark-to-model items tied to asset transfers 

Meaning: true liquidity is far lower than reported. 

2D. Political Angle: Deals, Influence, and the Administration’s Footprint 

In the current political climate, the administration’s footprint is crucial for every major economic deal. 

SMC’s transactions likely benefited from proximity to the leadership — but political shifts also show how influence-connection-network shapes outcomes across the corporate landscape. 

Take the Villar group: after apparently losing favor with the administration, their Primewater franchise has been terminated in several provinces, and authorities have cracked down on their real estate assets, claiming prior valuations were inflated. The SEC even revoked the accreditation of the appraiser involved. 

Meanwhile, MVP of Meralco reportedly eyes Primewater, underscoring how political favor reshapes corporate fortunes. Where Villar faces contraction, SMC and its allies (Meralco, Aboitiz) secure expansion through administration‑blessed asset transfers. 

In any case, it is possible that the deal had administrative blessing—or at least the nudge, given the proximity of the principals involved. The other possible angle is that this could be an implicit bailout dressed up as a buy-in deal. 

But the more important point is this: 

Even political closeness cannot permanently mask structural insolvency. 

SMC is too big to fail on paper — but too debt-bloated to hide forever, or political cover buys time, not solvency. 

Segment 2.1 — Meralco: A Utility Showing Profit, But Hiding Stress 

2.1A. Chromite Gas Holdings: Meralco’s New Largest Exposure 

Meralco’s Chromite Gas Holdings investment has become its largest exposure among joint ventures and associates, carried at Php 84.08 billion in 2025. Yet, despite the size, Chromite has contributed no direct revenues so far. 

The assets acquired from San Miguel Global are framed as enhancing Meralco’s ability to deliver reliable, stable, and cost‑effective electricity—but the numbers tell a different story—one shaped more by accounting and regulatory pass-throughs than by genuine economic or demand strength. 

2.1B. Q3 and 9M Performance: Meralco’s Money Illusion Revenues

Figure 4 

The headline 4% GDP in Q3 exposed Meralco’s fragility: 

• Revenues in gwh: –2.08% YoY, –6.64% QoQ.
• Electricity sales in pesos: +7.09% YoY, –3.35% QoQ.
• 9M gwh sales: –0.37% YoY, while peso sales rose +6%.
• Profitability: +18.19% in Q3, +9.93% in 9M. 

This is classic money illusion: peso revenues rise while physical demand falls. (Figure 4, upper and lower graphs) 

Operational output is not driving earnings. Instead, tariff pass‑throughs, higher generation charges, and regulatory adjustments inflate nominal sales. It is a regulatory inflation windfall, not genuine demand strength. 

2.1C. GDP Mirage and Debt Surge and Asset Inflation 

Meralco’s results reinforce that Q3 GDP was effectively lower than the 4% headline once adjusted for inflation and real‑sector contraction. Nominal growth masks real decline—exactly the GDP mirage motif you’ve been threading. 

More troubling is the balance sheet: 

• Debt surged +139% to Php 213.4 billion.
• Assets inflated +34.5% to Php 792 billion. 

This scale of short‑term expansion is not normal for a utility. It only happens when major assets are shuffled, revalued, or purchased at non‑market prices. Capex and operations do not explain it. Asset transfers do. 

2.1D. What This Really Means: Meralco as the Balance-Sheet Absorber 

Regulated returns (tariff-based profits) look stable, but the underlying structure is growing riskier. A utility with: 

• falling physical demand,
• surging debt, and
• massive non-operational asset expansion

is not strengthening — it is absorbing leverage for some entity. 

And that entity is SMC. 

The Chromite/Ilijan/EERI structure effectively places Meralco in the role of balance-sheet absorber for San Miguel’s asset-lightening strategy. 

Meralco’s earnings stability conceals a fragile, debt-heavy balance sheet inflated by SMC-linked asset transfers, not by real demand or utility fundamentals 

Segment 2.2 – AEV: Revenue Spikes as Balance-Sheet Shock Absorption 

Almost the same story applies to Aboitiz Equity Ventures. 

While AEV publicly emphasizes energy security, stability, market dominance, and regulatory influence as its core priorities, the weakening macro economy reveals a different angle.

Figure 5 

AEV posted Q3 revenues of +19.6%, pushing net income up +12.8%. (Figure 5, upper visual) 

But on a 9M basis, revenues were only +2.84% while net income fell –10.6% — a clear mismatch between quarterly momentum and year-to-date weakness. 

In its 17Q report, AEV notes that fresh contributions from Chromite Gas Holdings, Inc. (CGHI) drove the 5% rise in equity earnings from investees. This aligns precisely with the pattern seen in Meralco: newly consolidated or newly transferred assets creating a one-off jump. 

Meanwhile, the balance sheet shows the real story: 

• Debt surged 24.3% to Php 460.7B
• Cash jumped 15% to Php 90.84B
• Assets expanded 14.94% to Php 971B 

A sudden Q3 revenue surge combined with a weak 9M total is entirely consistent with: 

• Newly absorbed assets booking revenue only after transfer
• Acquisition timing falling post–June 2025
• Consolidation effects appearing sharply in Q3 

This means the revenue spike is not organic growth — it is the accounting after-effect of assets acquired or transferred in 1H but only recognized operationally in Q3. 

AEV’s cash swelling amid rapid debt accumulation strongly suggests:

• bridging loans used during staged acquisition payments
• temporary liquidity buffers ahead of full transfer pricing
• staggered settlement structures typical in large utility-energy asset sales
• pending regulatory approvals delaying full cash deployment 

Cash rises first → debt stays elevated → assets revalue → revenue shows up later. 

This pattern is classic in large asset transfers, not in real economic expansion. 

2.2A AEV’s Q3–9M: Not Evidence of Business Growth 

They are the accounting shadow of San Miguel’s 1H asset unloading—financed by AEV’s debt surge and disguised as operational growth. 

What looks like stability is really fragility recycling: AEV, like Meralco, has become a balance-sheet counterparty absorbing the system-wide effects of SMC’s asset-lightening strategy, with short-term profitability masking long-term stress. 

Segment 3.0 — The Batangas LNG–Ilijan–EERI Triangle 

3.A How One Deal Created Three Balance-Sheet Miracles 

If Segment 2 showed the operational weakness across SMC, Meralco, and Aboitiz, Segment 3 explains why their balance sheets still looked strangely “strong.” 

The answer lies in one of 2025’s most consequential but least-understood restructurings: 

The Batangas LNG–Ilijan–EERI triangle. 

This single transaction is the hidden engine behind the debt spikes, asset jumps, and sudden income boosts in Q2–Q3. 

Once you see this triangle, everything else snaps into place. 

1. The Triangle in One Line 

This wasn’t three companies expanding. 

It was one deal split three ways, enabling:

• SMC to book gains and create a “deleveraging” illusion
• Meralco to justify its 139% debt explosion
• Aboitiz to absorb a 24% debt spike while looking “strategically positioned” 

All this happened without producing a single additional unit of electricity. 

While the EERI–Ilijan complex is designed to deliver 1,200–2,500 MW of gas-fired capacity, as of Q3 only 850 MW are fully operational and a 425 MW unit remains uncertified — meaning the promised output exists largely on paper, not yet in reliable commercial dispatch. This reinforces the point: the triangle deal moved balance sheets faster than it delivered power.

2. How the Triangle Worked 

Here’s the real flow: 

• SMC restructured and monetized its stakes in Ilijan, Excellent Energy Resources Inc. (EERI) and Batangas LNG terminal
• Meralco bought in — financed almost entirely by new debt
• AboitizPower bought in — also financed by new debt 

The valuation uplift flowed back to SMC, booked as income and “deleveraging progress” 

The result: 

• All three balance sheets expanded
• None of them improved real output
• This was transaction-driven balance-sheet inflation, not industrial growth. 

3. Why This Triangle Matters: It Solves Every Q3 Puzzle 

Without this transaction, Q3 numbers look impossible:

• Meralco’s debt doubling despite falling electricity volume
• AEV’s Php 90B debt jump despite declining operating income
• SMC’s “improving leverage” despite worsening cash burn 

Once the triangle is added back in, the contradictions vanish:

• Meralco and AEV levered up to buy SMC’s assets
• SMC booked the valuation uplift as earnings
• All three appeared financially healthier — e.g. cash reserves jumped— without becoming economically healthier (Figure 5, middle graph) 

Q3 looked disconnected from reality because it was. 

4. The Illusion of Progress 

On paper:

• SMC: higher profit
• Meralco: larger asset base
• AEV: greater scale 

In substance:

• SMC gave up future revenue streams
• Meralco and AEV loaded up on liabilities
• System-wide fragility increased— e.g. accelerates the rising trend of financing charges. (Figure 5, lowest chart) 

The triangle recycles the same underlying cash flows, but layers more leverage on them. 

This is growth by relabeling, not growth by production. 

5. What This Signals for 2025–2026 

The triangle exposes the real state of Philippine corporate finance:

• cash liquidity is tight
• banks are reaching their risk limits
• debt has become the default funding model
• GDP “growth” is being propped up by inter-corporate transactions, not capex
• conglomerates are supporting each other through balance-sheet swaps 

Most importantly: 

This is a leverage loop, not an investment cycle. The mainstream is confusing balance-sheet inflation for economic progress. 

The Batangas LNG–Ilijan–EERI triangle created no new power capacity. Instead, it created the appearance of corporate strength.

Segment 4.0: Conclusion: How Concentration Becomes Crisis: The Philippine Energy Paradox 

The Philippine energy sector operates as a political monopoly with only the façade of market competition. 

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. 

This further entrenches concentration, while regulatory capture blinds the BSP, DOE, and ERC to mounting risks—encouraging moral hazard and ever-bolder risk-taking in expectation of eventual government backstops. 

This concentration funnels public and private savings into monopolistic hands, fueling outsized debt that competes directly with banks and government borrowings, intensifying crowding-out dynamics, resulting in worsening savings conditions, suppressing productivity gains, and constraining consumer growth. 

Fragility risks do not stop with the borrowers: counterparties—savers, local and foreign lenders, banks, and bond markets—are exposed as well, creating the potential for contagion across the broader economy. 

The feedback loop is self-reinforcing: policies fuel malinvestments, these malinvestments weaken the economy, and weakness justifies further interventions that deepen concentration, heighten vulnerability, and accelerate structural maladjustments. 

Viewed through a theoretical lens, San Miguel’s ever-expanding leverage fits a Minsky-style financial instability pattern—now extending into deals that serve as camouflaged backstops. This reflects what I call "benchmark-ism": an engineered illusion of stability designed to pull wool over the public’s eyes, mirroring Kindleberger’s cycle of manipulation, fraud, and corruption. 

Taken together, these dynamics reveal unmistakable symptoms of late-cycle fragility. 

What is framed as reform is, in truth, a vicious cycle of concentration, political capture, extraction, and systemic decay. 

____ 

references 

Prudent Investor Newsletters, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, Substack, August 24, 2025 

Prudent Investor Newsletters, Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? December 02, 2024

 

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