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

  

2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls

 

Deficits add up. Debt needs to be refinanced. And the larger the cost of servicing past spending, the less is available for the present. This is inherently and obviously a crackpot way to run a nation. It guarantees chaos, inflation, defaults and poverty—Bill Bonner 

In this issue

2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls 

In 2024, the Philippines' Savings-Investment Gap continued to widen to a near record, driven primarily by fiscal deficit spending—its effects and potential consequences discussed in two connected articles.

A. The Widening Savings-Investment Gap: A Growing Threat to Long-Term Stability

I. The Philippines as a Poster Child of Keynesian Economic Development

II. The Persistent Decline in Savings and the Investment Boom

III. Sectoral Investment Allocation and Bank Lending Trends

IV. Bank Lending Patterns and the Role of Real Estate

V. The SI Gap and the ’Twin Deficits’

VI. Conclusion: Deepening SI Gap a Risk to Long-Term Stability

B. 2024 Fiscal Performance: Narrower Deficit Fueled by Non-Tax Windfalls, Masking Structural Risks

I. 2024 Deficit Reduction: A Superficial Improvement? Revenue Growth: The Role of Non-Tax Windfalls

II. Government Spending Trends: A Recurring Pattern; Symptoms of Centralization

III. 2024 Public Debt and Debt Servicing Costs Soared to Record Highs!

IV. Public "Investments:" Unintended Market and Economic Distortions

V. Conclusion: Current Fiscal Trajectory a Growing Risk to Financial and Economic Stability 

A. The Widening Savings-Investment Gap: A Growing Threat to Long-Term Stability

I. The Philippines as a Poster Child of Keynesian Economic Development

 Figure 1

Businessworld, February 28, 2025: In 2024, the country’s savings rate — defined as gross domestic savings as a percentage of gross domestic product (GDP) — grew to 9.3%, reaching P2.47 trillion. Meanwhile, the investment rate was 23.7% of GDP, or P6.27 trillion, resulting in a P3.8-trillion gap. The savings-investment gap (S-I) gap — the difference between gross domestic savings and gross capital formation — shows a country’s ability to finance its overall investment needs. An S-I deficit occurs when a country’s investment expenditures exceed its savings, forcing borrowing to fund the gap. (Figure 1, topmost chart)

The Philippines may be considered one of the poster children of Keynesian economic development.

Given that aggregate demand serves as the foundation of the economy, national economic policies have been designed to stimulate and manage a spending-driven growth model, particularly through investment and consumption.

From a Keynesian perspective, the government is expected to compensate for any spending shortfall from the private sector by increasing its own expenditures.

The Savings-Investment Gap (SIG) serves as a key metric for tracking the evolution of aggregate demand management over time.

However, this ratio may be understated due to potential discrepancies in macroeconomic data—GDP figures may be overstated, while inflation (CPI) may be understated. Or, in my humble view, the actual savings rate may be even lower than indicated.

II. The Persistent Decline in Savings and the Investment Boom

The Philippines’ gross domestic savings rate has been in a downtrend since 1985, but it plummeted after 2018, coinciding with an acceleration in government spending. This trend worsened in 2020, when the pandemic triggered a surge in public expenditures. (Figure 1, middle image) 

From 1985 onward, the persistent decline in savings suggests a rise in household consumption, a "trickle-down effect," supported by accommodative monetary policy and moderate fiscal expansion.

Meanwhile, the investment rate surged between 2016 and 2019, driven by government-led initiatives, particularly the ‘Build, Build, Build’ program.

However, the 2020 collapse—where both savings and investment rates fell sharply—highlighted the government’s aggressive "automatic stabilization" response to the pandemic recession, which relied on RECORD deficit spending and monetary stimulus.

The Bangko Sentral ng Pilipinas (BSP) introduced unprecedented measures, including ₱2.3 trillion in liquidity injections, historic reductions in reserve requirements and policy rates, a managed USDPHP cap, and various financial relief programs.

III. Sectoral Investment Allocation and Bank Lending Trends 

The distribution of investments can be inferred from sectoral GDP contributions and bank lending trends. 

As of 2024, the five largest contributors to GDP were:

-Trade (18.6%)

-Manufacturing (17.6%)

-Finance (10.6%)

-Agriculture (8%)

-Construction (7.5%) (Figure 1, lowest graph) 

However, both manufacturing and agriculture have been in decline since 2000, suggesting that investments have largely flowed into trade, finance, and construction (including government-related projects).

Real estate, once a growing sector, peaked in 2015 and has since been in decline. Nevertheless, it remained the seventh-largest sector in 2024. It trailed professional and business services—which encompasses head office activities, architectural and engineering services, management consultancy, accounting, advertising, and legal services.

The top five GDP contributors accounted for 62.25% of total output, down from 66.06% in 2020, primarily due to the contraction in manufacturing and agriculture. 

IV. Bank Lending Patterns and the Role of Real Estate

Figure 2

While the real estate sector's share of real GDP declined, its share of bank lending expanded significantly. (Figure 2, topmost window) 

From 2014, real estate-related borrowing rose sharply, peaking in 2021, before moderating below 2022 levels. Nevertheless, real estate remained the largest client of the banking system in 2024, accounting for 19.6% of total loans. (Figure 2, middle diagram) 

That is—assuming banks have reported accurate data to the BSP. The reality is that banks often lack transparency regarding loan distribution and utilization (where the money is actually spent). 

Given that many retail investors (mom-and-pop borrowers) are very active in real estate, it is likely that actual exposure is understated, as banks may structure their reporting to circumvent BSP lending caps on the sector—it extended the price cap during the pandemic. 

In the meantime, the share of consumer lending has seen the most significant growth, surging after 2014 and becoming the dominant growth segment of bank credit. 

Meanwhile, the share of loans to the trade industry declined marginally, and manufacturing loans saw a steep drop—reflecting its GDP performance. 

Lending to the financial sector peaked in 2022 but has since declined, whereas credit to the utilities sector increased from 2014 to 2020 and has remained stable since. 

V. The SI Gap and the ’Twin Deficits’ 

The sharp decline in manufacturing underscores the structural imbalances reflected in the SI Gap, which in turn has contributed to the record "twin deficits" (fiscal and external trade). (Figure 2, lowest chart) 

As both consumers and the government spent beyond domestic productive capacity, the economy became increasingly reliant on imports to satisfy aggregate demand. 

Although the deficits have slightly narrowed from their pandemic peaks, they remain at ‘emergency stimulus levels’, posing risks to long-term stability. (see discussion on fiscal health below) 

These deficits have been—and will continue to be—financed through both domestic (household) and foreign (external debt) borrowing.

Figure 3 

The widening SIG has coincided with a decline in M2 savings growth, while the M2-to-GDP ratio surged, reflecting both credit expansion and monetary stimulus (including BSP’s money printing operations). (Figure 3, upper pane) 

External debt has also reached an all-time high in 2024, adding another layer of vulnerability. 

VI. Conclusion: Deepening SI Gap a Risk to Long-Term Stability 

The Philippines' growing S-I gap and declining savings rate reflect deep-seated structural imbalances that raise concerns about long-term economic stability. 

A shrinking domestic savings pool limits capital accumulation, increase dependence on external financing, and expose the economy to risks such as debt distress and currency fluctuations. 

B. 2024 Fiscal Performance: Narrower Deficit Fueled by Non-Tax Windfalls, Masking Structural Risks 

I. 2024 Deficit Reduction: A Superficial Improvement? Revenue Growth: The Role of Non-Tax Windfalls 

Inquirer.net, February 28: "The Marcos administration posted a smaller budget shortfall in 2024, but it was not enough to contain the deficit within the government’s limit as unexpected expenses pushed up total state spending. Latest data from the Bureau of the Treasury (BTr) showed that the budget gap had dipped by 0.38 percent to around P1.51 trillion last year. As a share of gross domestic product (GDP), the deficit improved to 5.7 percent last year, from 6.22 percent in 2023. But it still indicated that the government had spent beyond its means, requiring more borrowings that pushed the state’s outstanding debt load to P16.05 trillion by the end of 2024." (bold added)

Now, let us examine the performance of the so-called "public investment" in 2024.

Officials hailed the alleged improvement in the fiscal balance. One remarked, "This is the lowest since 2020 and shows the good work of the administration's economic team."

Another noted that "the drop in the deficit was ‘better than expected,’" implying that "the government no longer needs to borrow as much if the budget deficit is shrinking."

From my perspective, manipulating popular benchmarks—whether through statistical adjustments or market prices—as a form of political signaling to sway depositors and voters—is what I call "benchmark-ism."

While both spending and revenues hit their respective milestones, the 2024 fiscal deficit only decreased marginally from Php 1.512 trillion to Php 1.51 trillion. (Figure 3, lower image)

The so-called "improvement" mainly resulted from a decline in the deficit-to-GDP ratio, which fell from 6.22% in 2023 to 5.7% in 2024—a reduction driven largely by nominal GDP growth rather than actual fiscal restraint.

Authorities credit this "improvement" primarily to revenue growth.

While it's true that fiscal stimulus led to a broad-based increase in revenues, officials either deliberately downplayed or diverted attention from the underlying reality.

Figure 4

Despite record bank credit expansion in 2024, tax revenue only increased 10.8%, driven by the Bureau of Internal Revenue’s (BIR) modest 13.3% growth and the Bureau of Customs’ (BoC) paltry 3.8% rise. Instead, the real driver of revenue growth was an extraordinary 56.9% surge in NON-tax revenues, which pushed total public revenues up 15.56%. (Figure 4, middle image) 

As a result, the share of non-tax revenues spiked from 10.3% in 2023 to 14% in 2024—its highest level since 2007’s 17.9%! (Figure 4, topmost diagram) 

The details or the nitty gritty tell an even more revealing story. According to the Bureau of Treasury (February 27): "Total revenue from other offices (other non-tax, including privatization proceeds, fees and charges, grants, and fund balance transfers) doubled to PHP 335.0 billion from PHP 167.2 billion a year ago and exceeded the P262.6 billion revised program by 27.56% (PHP 72.4 billion) primarily due to one-off remittances." (bold added)

To emphasize: ONE-OFF remittances!

Revenues from "Other Offices" doubled in 2024, with its share jumping from 4.4% to 7.6%.

If this one-time windfall hadn’t occurred, the fiscal deficit would have exploded to a new record of Php 1.84 trillion! 

Despite the minor deficit reduction, public debt still surged. 

Public debt rose by 9.82% YoY (Php 1.435 trillion) in 2024—higher than 8.92% (Php 1.2 trillion) in 2023. (Figure 4, lowest graph) 

Was the increased borrowing in 2024 a response to cosmetically reducing the fiscal deficit? 

And that’s not all.

II. Government Spending Trends: A Recurring Pattern; Symptoms of Centralization

Figure 5

For the sixth consecutive year, the government exceeded the ‘enacted budget’ passed by Congress. The Php 157 billion overrun in 2024 was the largest since the post-pandemic recession in 2021, when the government implemented its most aggressive fiscal-monetary stimulus package. (Figure 5, topmost chart)

More importantly, this repeated breach of the "enacted budget" signals a growing shift of fiscal power from Congress to the executive branch.

Looking ahead, 2025’s enacted budget of Php 6.326 trillion represents a 9.7% increase from 2024’s Php 5.768 trillion.

The seemingly perpetual spending growth has been justified on the assumption of delivering projected GDP growth. 

While some "experts" claim the Philippines is becoming more ’business-friendly,’ the growing expenditure-to-GDP ratio tells a different story:

-The government is increasingly centralizing control over economic resources.

-This trend began in 2014, accelerated in 2016, and peaked in 2021 at 24.1%—the first breach of the enacted budget. After marginally declining to 21.94% in 2023, it rebounded to 22.4% in 2024. (Figure 5, middle image)

However, these figures only account for public spending. When factoring in private sector funds allocated to government projects, the true extent of government influence could easily exceed 30% of economic activity.

Of course, this doesn’t come for free. Government spending is funded through taxation, borrowing, and inflation. 

The more the government "invests," the fewer resources remain for private sector growth—the crowding out effect. 

This spending-driven economic model has distorted production and price structures, evident in: 

-The persistent "twin deficits"

-A second wave of inflation (Figure 5, lowest visual) 

III. 2024 Public Debt and Debt Servicing Costs Soared to Record Highs!

Figure 6

And surging public debt is just one of the consequences of crowding out the private sector. 

Public debt-to-GDP rose from 60.1% in 2023 to 60.7% in 2024—matching 2005 levels. (Figure 6, topmost diagram) 

More strikingly, debt service (interest + amortization) as a share of GDP surged from 6.6% in 2023 to 7.6% in 2024—its highest since 2011.

In fact, both debt-to-GDP and debt service-to-GDP in 2024 exceeded pre-Asian Crisis levels (1996-1997). 

Rising debt service costs imply that: 

1 Government spending will increasingly be diverted toward debt payments or rising debt service costs constrain fiscal flexibility, leaving fewer resources for essential public investments

2 Revenues will suffer diminishing returns as debt servicing costs spiral (Figure 6 middle window)

3 Growing risks of inflation (financial repression or the inflation tax)—as government responds with printing money

4 Mounting pressures for taxes to increase 

The principal enabler of this debt buildup has been the BSP’s prolonged easy money regime. (Figure 6, lowest chart)

Figure 7

The banking system has benefited from extraordinary BSP political support, including: Official rate and RRR cuts, liquidity injections, USDPHP cap and various subsidies and relief measures 

The industry has also functioned as a primary financier of government debt via net claims on central government or NCoCG), with banks acquiring government debt—reaching an all-time high in 2024. (Figure 7, topmost window)

IV. Public "Investments:" Unintended Market and Economic Distortions

This policy stance of propping up the banking system comes with unintended consequences. 

Bank liquidity has steadily declined—the cash-to-deposit ratio has weakened since 2013, mirroring the rising deficit-to-GDP ratio. (Figure 7, middle graph) 

Market distortions are also evident in declining stock market transactions and the PSEi 30’s prolonged bear market—despite interventions by the so-called "National Team." (Figure 7, lowest chart)

V. Conclusion: Current Fiscal Trajectory a Growing Risk to Financial and Economic Stability 

So, what’s the bottom line? 

Government "investment" is, in reality, consumption. 

It has fueled economic distortions, malinvestment, and ballooning public debt—ultimately crowding out private sector investment and jeopardizing fiscal sustainability. 

Political "free lunches" remain popular, not only among the public but also within the “intelligentsia” class or the intellectual cheerleaders of the government.

As we warned last December: 

"Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond. 

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout. 

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability." (Prudent Investor 2024)

 ___

References: 

Prudent Investor, Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status December 1, 2025

 

 

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

 

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse—Ludwig von Mises 

In this issue

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

I. A Closer Look at the Flawed Foundations of the CPI

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

III. A Brief Look at Inflation Era 1.0; Key Questions

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

V. Demand Side Inflation: Record 11-Month Public Spending 

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

A sharp increase in liquidity conditions last November, driven by BSP measures and bank activities, has likely spilled over into prices. Could December’s CPI signal the start of a third wave in the current inflation cycle?

I. A Closer Look at the Flawed Foundations of the CPI

Before we proceed with our exegesis of the Philippine Consumer Price Index (CPI) from last December, it is essential to clarify our position, which diverges from the mainstream acceptance of the inflation benchmark.

We argue that the CPI is structurally flawed for the following reasons:

1. Subjective Nature of Personal Utilities

Because people engage in exchanges to improve their well-being, prices reflect the subjective evaluations of individual economic participants.

As such, comparing personal utilities is inherently impossible because they are subjectively determined, depending on the specific circumstances of an individual, including their operating environment, preferences, values, and hierarchy of needs.

As we explained in 2022 (bold original):

Yet, the thing is, the most substantial argument against the CPI comes from its essence: it is impossible to quantify or average the spending activities of individuals. Everyone has different 'inflation.' The consumption basket varies from one individual to another. And the composition of an individual's consumption basket is never static or constant because it is subjectively determined; it is dynamic or consistently changes. 

Therefore, because the assumption used to generate an estimated CPI is fallacious, the CPI is structurally flawed. (Prudent Investor 2022) 

2. CPI as a Political Statistic 

The CPI is not merely an economic measure; it is, arguably, the most significant political statistic.  

From the Philippine Statistics Authority (FAQ): CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.

In this context, the political objectives of the administration may influence the calculation of economic indicators, rather than reflecting actual estimates. 

For example, the Consumer Price Index (CPI) plays a significant role in determining bond market rates and interest rates. By understating the CPI, the government can effectively engage in "financial repression," which entails the implicit and artificial lowering of interest rates to subsidize government debt.  

Moreover, beyond facilitating government borrowing, an artificially suppressed CPI also inflates GDP figures, creating a perception of stronger economic performance. 

The periodic (six-year) base year adjustments used for calculating the CPI—intended to reflect the most current composition of goods and services—are inherently biased toward reducing inflation rates. Consequently, CPI figures would likely be higher if calculated using the previous base year of 2006 compared to the current base year of 2018. 

3. The CPI Data and Official Narrative on Inflation 

CPI data and the official narrative often portray inflation as an inherently supply-side-driven phenomenon. 

The sectoral composition of the CPI baskets appears biased, fostering the perception that price increases (inflation) are predominantly caused by supply-side factors. This perspective is consistently reinforced by official explanations, which highlight supply disruptions as the primary drivers of inflation. 

Ironically, however, the Bangko Sentral ng Pilipinas (BSP)’s policy responses have been predominantly demand-side in nature. These responses include interest rate adjustments, reserve requirement ratio (RRR) changes, and regulatory relief measures such as the credit card interest rate cap, as well as quantitative easing or liquidity injections. On rare occasions, political interventions, like the Rice Tariffication Law, address supply-side issues directly. 

In reality, if prices were allowed to function freely, supply-side imbalances would typically resolve themselves in the short term. 

Moreover, with a fixed money supply, an increase in demand for specific goods or services, leading to higher prices, would naturally result in reduced demand for other goods or services, causing their prices to decline. This dynamic reflects changes in relative prices (increases and decreases), which do not equate to a general rise in overall price levels. For example, households operating within fixed budgets and without access to credit exemplify this principle. 

However, when prices for most goods and services rise simultaneously, it indicates a condition of "too much money chasing too few goods." In other words, a generalized price increase arises when the growth of money supply (via credit expansion) outpaces the growth in goods and services. 

In the immortal words of Nobel Laureate Milton Friedman in an interview: (bold mine) 

It [Inflation] is always and everywhere, a monetary phenomenon. It's always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output…

If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen or it's produced by grasping unions or it's produced by spendthrift consumers, or maybe, it's those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn't? Trade unions are grasping. Who of us isn't? And there's no doubt that the consumer is a spendthrift. At least every man knows that about his wife. 

But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money. (Friedman, Heritage Foundation)

This underscores the reality that inflation is driven by excessive monetary expansion rather than purely supply-side factors.

Figure 1

Aside from this author, has anyone pointed out the deepening reliance of GDP on money supply growth? (Figure 1, topmost graph)

4. The CPI as a Tool for Narrative Control

The BSP and the government’s approach to inflation management often involves shaping public perception through strategic "narrative control." A clear example of this is the establishment’s "pin-the-tail-on-the-donkey" CPI forecasting exercise:

-At the close of each month, the BSP releases a forecast range for the monthly inflation rate, usually spanning a margin of approximately 80 basis points.

-"Establishment experts" then publish their single-point predictions, which the media aggregates into a "median estimate."

-When the Philippine Statistics Authority (PSA) announces the official inflation rate, it almost always falls within the BSP’s forecast range—except during anomalous periods, such as the CPI spikes in 2022-2023.

This practice reinforces the establishment narrative and helps frame the public’s understanding of inflation within a constrained Overton Window, limiting alternative interpretations of its causes and dynamics.

As I elaborated in 2024 (bold and italics original): 

In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation. 

The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints.  

Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016) 

More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation.   

Make no mistake: the structural flaws of the CPI arise not only from a critical economic perspective but, more significantly, from a political dimension designed to shift the blame for price instability onto the market economy.  

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

Our dialectic of the CPI’s critical flaws serves as the foundation for examining December’s CPI data. 

Let us explore the issue from the perspective of the mainstream viewpoint.

Reuters, January 7: Philippine annual inflation quickened for a third straight month in December due to the faster pace of increases in food and utility costs, the statistics agency said on Tuesday. The consumer price index (CPI) rose 2.9% in December, higher than the 2.6% forecast in a Reuters poll, and was above the previous month's 2.5% rate. December's inflation print brought average inflation in 2024 to 3.2%, well within the central bank's 2%-4% target for the year, marking the first time since 2021 that the Philippines has achieved its inflation goal. 

Though December marked the third consecutive monthly YoY increase, boosting the month-on-month (MoM) change, the upward momentum has not been strong enough to signal a decisive breakout from its year-on-year (YoY) downtrend. (Figure 1, middle image) 

Typically, a MoM rate exceeding 1% is required to achieve this. 

However, while food prices continue to play a significant role in driving up the headline CPI, their influence has been diminishing. This shift indicates broader sectoral contributions, primarily driven by housing, utilities, and transport in December. (Figure 1, lowest diagram)

Figure 2

The uptrend has been most pronounced in the transport sector, while momentum in housing and utilities has recently gained strength. (Figure 2, topmost chart)

The broadening increase in prices has also led to an expansion in the non-food and energy CORE CPI. Both the CORE and headline CPI appear to have made a turn reminiscent of patterns seen in 2015 and 2022. (Figure 2, middle pane) 

If this momentum persists, the headline CPI may be transitioning into the third wave of the current inflation cycle, which has now entered its tenth year.

III. A Brief Look at Inflation Era 1.0; Key Questions

Should the third wave, characterized by the current series of increases, be confirmed, the headline CPI is likely to surpass its 2022 high of 8.7%. 

This inflation cycle is not an anomaly; it mirrors historical precedent, specifically the secular inflation era (1.0), which spanned three inflation cycles from 1958 to 1986. (Figure 2, lowest graph) 

This brings us to several critical questions:

>How do supply-side (cost-push) factors contribute to driving an inflation cycle or even a prolonged era of inflation?

>Does the current inflation cycle mark the beginning of an "Inflation Era 2.0"?

>Which mainstream experts have anticipated and explained this phenomenon?

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

A striking contrast exists between the government's data on the bottom 30% of income earners and the Social Weather Stations (SWS) self-rated poverty survey.

Figure 3

The Consumer Price Index (CPI) for the bottom 30% income group presents one of the most fascinating – and somewhat contradictory – data points in CPI coverage. (Figure 3, topmost window) 

It indicates that the food CPI for this income group has decreased at a faster rate than the overall headline CPI, resulting in a negative spread for the first time since at least 2022. This suggests that the bottom 30% has benefited from easing food inflation, ostensibly leading to ‘reduced inequality.’ 

This assumption appears to be based on the notion that stores have provided price discounts to this income group or that conditions have improved due to assistance from food banks. 

Conversely, a private poll reported that instances of self-rated poverty surged to their highest level since 2003, reaching a 21-year high! 

SWS Report, January 8 2025: The December 2024 percentage of Self-Rated Poor families of 63% was 4 points up from 59% in September 2024, rising steadily for the third consecutive quarter since the significant 12-point rise from 46% in March 2024 to 58% in June 2024. This was the highest percentage of Self-Rated Poor families in 21 years, since 64% in November 2003. (Figure 3, middle visual) 

If this poll is accurate, it implies that a vast majority of households continue to suffer from the erosion of the peso’s purchasing power. 

The recent decline in the CPI rate, far from indicating relief, might instead signify a “boiling frog syndrome”—a slow, almost imperceptible build-up of economic hardship. This is evidenced by deteriorating consumption patterns and increasing pessimism, despite near-record employment rates. 

In November 2024, employment rates reached their third-highest level, continuing a trend of near-full employment since Q4 2023. (Figure 3, lowest chart) 

Still, despite this robust employment dynamic, inflation has continued to decline. 

Does this mismatch between self-rated poverty levels and employment gains highlight productivity improvements that are not reflected in wage and income growth?  

Alternatively, could this gap reflect potential manipulation or "padding" of labor data for political purposes ahead of upcoming elections? 

As I noted back in October 2024: (bold and italics original) 

All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.  

As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception. 

Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either. 

In any case, we suspect that a phone call from the office of the political higher-ups may compel conflicting surveys to align as one. 

Apparently, that phone call to influence the self-rated poverty survey has yet to occur. 

Furthermore, the multi-year high in self-rated poverty could also be symptomatic of government policies involving "financial repression" or an "inflation tax," which redistributes finances and resources from the private sector to the government to subsidize its political spending.

This raises an important question: Whose sentiment truly reflects the public's conditions?  

On one hand, government data suggests a vague improvement for low-income households due to easing food prices.  On the other hand, SWS data indicates a historic rise in self-rated poverty.  

The divergence between these two perspectives underscores the complex economic realities faced by different segments of society as they confront inflation.

V. Demand Side Inflation: Record 11-Month Public Spending

Let us now shift our focus to the demand side of the inflation cycle.

Figure 4

The first and most significant demand-side driver of inflation cycles is public debt-fueled deficit spending. (Figure 4, topmost image)

Thanks to robust tax collections, the 11-month fiscal deficit has fallen to its lowest level since 2020, despite reaching a historic high in public spending over the same period. 

However, while current tax revenues have supported fiscal health, they are subject to the variability of economic conditions and the efficiency of tax administration, whereas government spending is determined by Congressional appropriations. 

Still, diminishing returns and the crowding-out effect could slow GDP growth—or even trigger a recession—leading to reduced tax revenues. This could drive deficits back to record-high levels. 

In any case, public spending at an all-time high inevitably fosters heightened competition with the private sector for resources and financing. This competition—the crowding out syndrome—serves political objectives but disrupts economic allocation, production, and pricing. 

The Philippine budget is set to grow by 9.7% to Php 6.326 trillion in 2025, reinforcing its long-term upward trend in public expenditures. 

Unsurprisingly, this accelerating trend in public spending has closely correlated with the first inflation cycle. 

Also, this is in seeming response to the Q3 2024 GDP slowdown and a deflationary spiral in real estate prices, 'Marcos-nomics' stimulus measures have only intensified. 

That’s in addition to the administration’s positioning for this year’s elections.

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System 

Despite the CPI gradually rising, the BSP cut interest rates twice in Q4 2024, supported by a significant reduction in the bank’s reserve requirements. 

When similar measures were implemented during the pre-pandemic and pandemic phases (2018–2020), they fueled the first leg of the second wave of the inflation cycle. Is history repeating itself? (Figure 4, middle diagram)

After an 11-month plateau, the banking system’s net claims on the central government (NCoCG) surged to a record-high Php 5.31 trillion in November 2024! (Figure 4, lowest window) 

Banks may have responded to an implicit directive from the BSP, which has contributed to the growth of the money supply. 

Additionally, the BSP’s ‘easing cycle’ prompted a surge in bank lending, particularly to the struggling real estate sector and consumers.

Universal-commercial (UC) bank lending grew by 11.34% in November, driven largely by a 10.11% increase in lending to the real estate sector, which reached a record-high Php 2.57 trillion. 

Meanwhile, UC consumer bank lending (excluding real estate) jumped 23.3% to a historic Php 1.54 trillion.

Figure 5

Overall, systemic leverage—defined as UC bank loans plus public debt—expanded by 11.1%, reaching an all-time high of Php 28.44 trillion.  (Figure 5, topmost chart) 

This growth drove a sharp increase in M3 money supply, from 5.43% in October to 7.7% in November. 

Despite BSP claims of ‘restrictive’ financial conditions, growth rates of systemic leverage have been rising steadily since its trough in September 2023. 

The BSP’s easing measures in the second half of 2024 have undoubtedly contributed to this systemic expansion in leverage. 

The combination of liquidity injections through NCoCG and surging systemic leverage has also driven growth in M1 money supply, which again rose 7.7% in November—reaching levels seen in October 2023. 

If history offers any guidance, reminiscent of 2014 and 2019, the current surge in cash circulation—which accounted for 30.83% of November’s M1—has likely contributed to the broadening increase in non-food and non-energy core inflation, supporting the notion that the headline and core CPI have already bottomed out. (Figure 5, middle graph) 

Notably, M1’s influence on price pressures occurs with a time lag. This means that certain price increases, due to increased spending in sectors benefiting most from credit expansion—such as real estate and their principal lenders, the banks—eventually percolates into the broader economy. 

This clearly reflects the BSP’s implicit backstop for the real estate sector and its key counterparties—the banking system. 

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields 

Another factor that appears to be providing a behind-the-scenes support to inflation is the BSP’s US dollar Philippine peso USDPHP exchange rate cap. 

As we previously noted,

Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap. (Prudent Investor, 2024)

Although November’s trade deficit narrowed to USD 4.77 billion due to a 4.93% decline in imports and an 8.7% slump in exports, it remains within the record levels seen in 2022. (Figure 5 lowest window)

Figure 6

The risk of a sudden devaluation grows as the persistent trade deficits erode the BSP's ability to defend the USDPHP ceiling magnifying inflation risks. (Figure 6, topmost diagram) 

Additionally, the recent shift in the Philippine treasury yield curve—from a flattening, belly-inverted slope to a steepening curve driven by surging bond rates—has further underscored this vulnerability. (Figure 6, middle image) 

Besides, rising yields on US Treasury bonds could influence upward pressure on Philippine rates. (Figure 6, lowest chart) 

US inflation can indirectly impact the Philippines through global trade, commodity prices, and capital flows.  For example, rising US inflation may lead to higher prices for imported goods, thus contributing to increased inflation domestically in the Philippines. 

Additionally, US Treasury yields act as a global benchmark for interest rates. When US yields rise, typically due to higher inflation expectations or tightening monetary policy by the Federal Reserve, it can exert upward pressure on bond yields in other countries, including the Philippines. 

This dynamic occurs as foreign investors may seek higher returns, which in turn can push up domestic yields. The influence of rising US bond rates on Philippine yields underscores the interconnectedness of global financial markets and reflects the broader impact of US economic conditions on emerging market economies. 

Furthermore, if the BSP insists on continuing its ‘easing cycle’ under such conditions, it risks stoking the embers of inflation, which could further weaken the USD-Philippine peso exchange rate. 

Sure, while it’s true that the structural economic conditions of the Inflation Era 1.0 differ from today’s—marked by advances in technology, globalization, and other factors—the political landscape remains strikingly similar. Authorities are still using leverage both directly (through deficit spending) and indirectly (through asset bubbles) to extract resources from the private sector. As such, the outcome—an Inflation Era 2.0—seems increasingly likely to echo its predecessor. 

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave 

To wrap things up, December’s CPI has shown signs of a potential bottom and has laid the groundwork for the third upside wave of this inflation cycle. 

Aside from the turnaround in the CORE CPI, which indicates a broadening of price increases across the economy, the record quantitative easing by banks in support of record public spending and all-time highs in public debt have injected substantial liquidity into the system. 

This, combined with the accelerating growth in bank lending, has intensified liquidity growth. As a result, this increased liquidity tends to diffuse into the economy with a time lag, eventually leading to higher prices.

___

References: 

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

Philippine Statistics Authority Consumer Price Index and the Inflation Rate, Frequently Asked Questions 

Milton Friedman, The Real Story Behind Inflation, The Heritage Foundation 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10 2024  

Prudent Investor, Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages October 13, 2024  

Prudent Investor, How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, January 2, 2025