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 USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility

 

Devaluing is a de facto default and the manifestation of the insolvency of a nation—Daniel Lacalle 

In this Issue

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

Part I: The USD-Philippine peso Breach at Php59

IA. The Soft Peg’s Strain Finally Shows

IB. "Market Forces" or Managed Retreat?

IC. Gold, GIR, and the Mirage of Strength

ID. Historical Context: Peso Spikes and Economic Stress

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending

IIB. Misclassified Investment, ICOR and the Productivity mirage

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67?

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

How the BSP’s widening savings–investment gap, soft peg, flood control response left the peso exposed—and what it reveals about the Philippine economy.

Part I: The USD-Philippine peso Breach at Php59 

IA. The Soft Peg’s Strain Finally Shows 

This is what we posted at X.com 

After three years, $USDPHP breaks the BSP’s 59 Maginot line. What cracked it?

• 👉 Record savings–investment gap (BSP easing, deficit spending, CMEPA)
• 👉 BSP soft peg (gold sales)
• 👉 Capital controls fueling flight
• 👉 Weak economy + high debt 

The soft peg’s strain finally shows. 

After three years of tacit defense, the BSP’s 59.00 line cracked on October 28. Yet it closed the week—and the month—at 58.85, just below what we’ve long called the BSP’s ‘Maginot line.’ 

IB. "Market Forces" or Managed Retreat? 

The BSP and media attributed the breach to “market forces.” But if the peso’s rate is truly market-determined, why issue a press release at all? To reassure the public? Why the need for reassurance? And if the breakout were merely “temporary,” why frame it at all—unless the goal is to condition perception before the markets interpret the breach as systemic or draw their own conclusions?

Figure 1

Another dead giveaway lies in the BSP’s phrasing: it “allows the exchange rate to be determined by market forces.” (Figure 1, upper image)

That single word—allows—is revealing. 

It presupposes BSP supremacy over the market, implying that exchange rate movements occur only at the central bank’s discretion. FX determination, in this framing, is not a spontaneous process but a managed performance. Market forces operate only within the parameters permitted by the BSP. “Allowing” or “disallowing” thus reflects not market discipline, but bureaucratic control masquerading as market freedom. 

Yet, the irony is striking: they cite “resilient remittance inflows” as a stabilizer—even as the peso weakens. If OFW remittances, BPO earnings, and tourism inflows are as strong as claimed, what explains the breakdown? 

Beneath the surface, the pressures are unmistakable: thinning FX buffers, rising debt service, and the mounting cost of defending a soft peg that was never officially admitted.

IC. Gold, GIR, and the Mirage of Strength

Then there’s the gold angle. 

In 2024, the BSP was the world’s largest central bank seller of gold—offloading reserves to raise usable dollars. (Figure 1, lower chart)

Figure 2

Now, higher gold prices inflate its GIRs on paper—an accounting comfort masking liquidity strain. It’s the same irony we saw in 2021–22, when the BSP sold gold amid a pandemic recession and the peso still plunged. (Figure 2, upper graph) 

Adding to the drama, the government announced a price freeze on basic goods just a day before the peso broke Php 59. Coincidence—or coordination to suppress the impact? 

And there was no “strong dollar” to blame. The breakout came as ASEAN peers—the Thai baht, Indonesian rupiah, Singapore dollar, and Malaysian ringgit—strengthened. This was a PHP-specific fracture, not a USD-driven move. (Figure 2, lower table) 

ID. Historical Context: Peso Spikes and Economic Stress

Figure 3

Historically, sharp spikes in USDPHP have coincided with economic strain:

• 1983 debt restructuring
• 1997 Asian Financial Crisis
• 2000 dotcom bubble bust
• 2008–2010 Global Financial Crisis
• 2020 pandemic recession (Figure 3, upper window)

The BSP even admitted “potential moderation in economic growth due in part to the infra spending controversy” for this historic event. That makes reassurance an even more potent motive. 

Remember: USDPHP made seven attempts to breach 59.00—four in October 2022 (3, 10, 13, 17), three from November 21 and 26 to December 19, 2024. That ceiling revealed the BSP’s implicit soft peg. The communique doesn’t explain why the eighth breach succeeded—except to say it was “market determined.” But that’s just another way of saying the market has abandoned the illusion of BSP control. (Figure 3, lower diagram)

As I’ve discussed in earlier Substack notes, this moment was years in the making: 

• The widening savings–investment gap
• CMEPA’s distortions
• Asset bubbles, the creeping financial repression and fiscal extraction that eroded domestic liquidity 

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide. 

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending 

Spending drives the economy.  That ideology underpins Philippine economic policy—from the BSP’s inflation targeting and deficit spending to its regulatory, tax, and FX regimes—and it has culminated in a record savings–investment (SIG) gap. 

This is the Keynesian hangover institutionalized in Philippine policy—confusing short-term demand management with sustainable capital formation 

But this is not merely technocratic doctrine; the obsession with spending anchors the free-lunch politics of ochlocratic social democracy. 

Yet even the SIG is a flawed metric. 

As previously discussed, “savings” in national accounts is a residual GDP-derived figure riddled with distortions, not an empirical aggregation of household or corporate saving. It even counts government savings—retained surpluses and depreciation allowances—when, in truth, fiscal deficits represent outright dissaving. (see reference) 

Worse, the inclusion of non-cash items such as depreciation and retained earnings inflates measured savings, masking the erosion of actual household liquidity.

IIB. Misclassified Investment, ICOR and the Productivity mirage 

Even the “investment” side is overstated. Much of it is public consumption misclassified as capital formation. Because politics—not markets—dictate pricing and returns, the viability of monopolistic political projects cannot be credibly established. 

Consider infrastructure. Despite record outlays, the Incremental Capital-Output Ratio (ICOR) has worsened—proof that spending does not equal productivity.

Figure 4

According to BSP estimates, the Philippines’ ICOR has fallen from around 8.3 in the 1989-92 period to approximately 4.1 in 2017-19, contracted by 12.7% and recovered to around 3.0 by 2022 (see reference) (Figure 4, topmost visual) 

While the ICOR trend suggests some efficiency gains since the 1990s, it remains a blunt and often misleading proxy—distorted by GDP rebasing, project misclassification, and delayed returns. What it does reveal, however, is the widening gap between spending and sustainable productivity 

Listed PPP firms, meanwhile, sustain appearances through leverage, regulatory capture and forbearance, and mark-to-model accounting. The result is concealed fragility, reinforced by the hidden costs of various acts of malfeasance, conveniently euphemized as by the public as “corruption.” 

In the end, the SIG tells a simple truth: domestic savings are too scarce to fund both public and private investment. The gap is bridged by FX borrowing. 

But this is not a sign of strength—it’s a symptom of deepening structural dependence, masked by monetary theater and fiscal illusion, thus amplifying peso vulnerability. Every fiscal impulse now imports external leverage, entrenching the illusion of growth at the expense of stability. 

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown 

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology 

Spending-as-growth isn’t just policy—it’s pathology.

While the BSP’s mandate is "to promote price stability conducive to balanced and sustainable growth," its inflation-targeting framework—tilted toward persistent monetary easing—has effectively become a GDP-boosting machine to finance free-lunch political projects. 

Banks have realigned their balance sheets accordingly. Consumer loans by universal and commercial banks rose from 8.2% of total lending in December 2018 to 13.5% in August 2025—a 64% surge—while the share of industry loans declined from 91.7% to 86.5% over the same period. (Figure 4, middle pane) 

Fueled by interest rate subsidies and real income erosion, households are leveraging aggressively to sustain consumption. Yet as GDP growth slows, the marginal productivity of credit collapses—meaning every new peso of debt generates less output and more fragility for both banks and borrowers. 

Production credit’s stagnation also forces greater import dependence to meet domestic demand.

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits 

Meanwhile, deficit spending—now nearing 2021 pandemic levels—artificially props up consumption at the expense of productivity gains. (See reference for last week’s Substack.) 

Together, credit-fueled consumption and fiscal excess have produced record "twin deficits." (Figure 4, lowest chart) 

The fiscal deficit widened from Php 319.5 billion in Q2 to Php 351.8 billion in Q3, while the trade deficit expanded from USD 12.0 billion to USD 12.76 billion—levels last seen in 2020. 

Historically, fiscal deficits lead trade gaps—it raises import demand. If the budget shortfall hits fresh records by year-end, the external imbalance will likely push the trade deficit back to its 2022 peak.

Figure 5

These deficits are not funded by real savings but by credit—domestic and external. The apparent slowdown in approved public foreign borrowings in Q3 likely masks rescheduling (with Q4 FX borrowings set to spike?), delayed recognition, shift to BSP-led financing (to reduce scrutiny) or accounting prestidigitation (Figure 5, topmost diagram) 

Public external debt accounted for roughly 60% of the record USD 148.87 billion in Q2. Even if Q3 slows, the trajectory remains upward. (Figure 5, middle graph) 

In short, widening twin deficits mean more—not less—debt. 

Slowing consumer sales growth, coupled with rising real estate vacancies, signals that private consumption is already being crowded out—a deepening symptom of structural strain in the economy.

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

Yet the newly enacted CMEPA (Capital Market Efficiency Promotion Act, R.A. 12214) deepens the financial repression: it taxes savings, institutionalizes these by redirecting or diverting household savings into state-controlled channels or equity speculation, and discriminates against private-sector financing. By weakening the deposit base, it also amplifies systemic fragility. The doubling of deposit insurance last March, following RRR cuts, appears preemptive—an implicit admission of the risk CMEPA introduces. 

Authorities embraced a false choice. Savers are not confined to pesos—they can shift to dollars or move capital abroad entirely. Capital flight is not theoretical; for the monied class, it can be a reflexive response. 

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis 

The recent “flood control” corruption scandal has merely exposed the deeper rot. 

Consensus recently blames the peso’s fall and stock market weakness on “exposed corruption.” But this is post hoc reasoning: both the peso and PSEi 30 peaked in May 2025—months before the scandal broke. (Figure 5, lowest image)

Corruption, as argued last week, is not an aberration—it’s embedded or a natural expression of free-lunch social democracy 

It begins at the ballot box and metastasizes through centralization, cheap money, financial repression, the gaming of the system and rent-seeking. It explains the entrenchment of political dynasties and the extraction economy they operate on. 

What media and the pundits call “corruption” is merely the visible tip. The deeper pathology is malinvestment—surfacing across: 

• Bank liquidity strains
• Wile E. Coyote NPLs
• Record real estate vacancies
• Slowing consumer spending despite record debt
• Cracks in employment data
• Persistently elevated self-rated poverty ratings (50% + 12% borderline as of September).
• Stubborn price pressures and more… 

The BSP’s populist response to visible corruption? 

Capital controls, withdrawal caps, probes, and virtue signaling. These have worsened the erosion of confidence, potentially accelerating the flight to foreign currency—and escalating malinvestments in the process. (see reference) 

What emerges is not just structural decay, but a slow-motion confidence collapse. 

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant 

And there is more. The BSP also operates a de facto FX soft-peg regime. 

By keeping a lid on its tacit thrust to devalue, its implicit goal is not merely to project macro stability, but to subsidize the USD and manage the CPI within its target band. Unfortunately, this policy overvalues the peso, encouraging USD-denominated borrowing and external savings while providing the behavioral incentive for capital flight.

Figure 6

Including public borrowing, the weak peso has prompted intensified growth in the banking system’s FX deposits. In August 2025, FX deposits rose 11.96%—the second straight month above 10%—reaching 15.07% of total bank liabilities, the highest since November 2017. (Figure 6, topmost window) 

The BSP’s FX regime also includes its reserves management—Gross International Reserves (GIR).

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns 

As noted above, similar to 2020–2021, the BSP embarked on massive gold sales to defend the USDPHP soft peg. Yet the peso still soared 22.97% from 47.90 in May 2021 to 58.9 in September 2022. That pandemic-era devaluation coincided with a CPI spike—peaking at 8.7% in January 2023. The 2024 gold sales echo this pattern, offering a blueprint for where USDPHP could be heading. 

The BSP insists that benchmarks like the GIR assure the public of sufficient reserves. Yet it has never disclosed the composition in detail. Gold—which the BSP remains averse to—accounts for only ~15% of the GIR (September). A former BSP governor even advocates selling gold "to profit” from it." (2020 gold sales and devaluation occurred in his tenure) 

But since the BSP doesn’t operate for profit-and-loss, but for political objectives such as "price stability," this logic misrepresents intent.

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap 

A significant portion of GIR—around 5%—consists of repos, derivatives, and other short-term instruments classified as Other Reserve Assets (ORA), introduced during the 2018 peso appreciation. Not only that: national government borrowings deposited with the BSP are also counted as GIR. Hence, “borrowed reserves” make up a substantial share. (Figure 6, middle graph) 

If reserves are truly as strong as officially claimed, why the peso breakout—and the need for a press release? 

All this is reflected in the stagnating growth of BSP net foreign assets (NFA) since 2025, reinforcing a downtrend that began in 2013. While nominally at Php 6.355 trillion, NFA is down 2.1% from the record Php 6.398 trillion in November 2024. (Figure 6, lowest diagram)

Figure 7

This fragility is also evident in the balance of payments (BOP) gap. Though narrowing in recent months, it reached USD 5.315 billion year-to-date—its highest since the post-pandemic recession of 2022. That’s 67% of the November 2022 peak. (Figure 7, topmost graph) 

The apparent improvement merely reflects deferred pressure—delayed borrowings and import compression. 

Despite BSP claims, net outflows reflect more than trade gaps. They signal external debt servicing amid rising leverage, capital flight, and systemic strain.

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67? 

Last March, we wrote: 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61–62 range. (see reference) 

At the time, our lens was historical—measuring breakout levels from 2004 to 2022 and projecting forward to 2025. 

But as noted above, USDPHP spikes rarely occur in a vacuum. They tend to coincide with economic stress. Using BSP’s end-of-quarter data, we find: (Figure 7, middle table) 

• 1983 debt restructuring: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.15% over 6 quarters (Q1 1997–Q3 1998)
• 1999–2004 dotcom bust: +30.6% over 20 quarters (Q2 1999–Q1 2004)
• 2007–2009 Global Financial Crisis: +16.95% over 5 quarters (Q4 2007–Q1 2009)
• 2020–2022 pandemic recession: +22.64% over 7 quarters (Q4 2020–Q3 2022) 

While the USDPHP also rose from 2013–2018, this episode was largely driven by the Fed’s Taper Tantrum, China’s 2015 devaluation, and Trump-era fiscal stimulus—with no comparable economic event.

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The current moment is different. 

Using the post-2022 low—Q2 2025 at 56.581—as a base, a 10% devaluation implies a target of 62.24. But with the late-cycle unraveling, a weakening domestic economy, and rising debt burdens, the odds tilt towards a deepening of stagflation—or worse. If the peso mirrors its pandemic-era response, a 20% devaluation to 67.90 is not far-fetched. 

Even the BSP now concedes "potential moderation in economic growth." 

Yet it continues to cite “resilient inflows” like tourism. The Department of Tourism data tells another story: as of September 2025, foreign arrivals were down 3.5% year-on-year—hardly a sign of strength. (Figure 7, lowest chart) 

Otto von Bismarck’s maxim applies: 

Never believe anything in politics until it has been officially denied. 

Hounded by diminishing returns and Goodhart’s Law—where every target becomes a distortion—the BSP clings to benchmarks that no longer signal strength. From the USDPHP to GIR composition, Net Foreign Assets, and FX deposit ratios, the metrics have become theater. The more they’re defended, the less they reflect reality.

In the face of unraveling malinvestments, deepening institutional opacity, and accelerating behavioral flight, the BSP is whistling past the graveyard. 

Caveat emptor. The illusion is priced in.  

____ 

References 

Bangko Sentral ng Pilipinas, Discussion Paper Series No. 2024-10: Estimating the Incremental Capital Output Ratio (ICOR) for the Philippines, Towards Greater Efficiency: Estimating the Philippines’ Total Factor Productivity Growth and its Determinants BSP Research Academy, June 2024. 

Prudent Investor Newsletters: 

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

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 27, 2025 

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

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? Substack, March 03, 2025 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, Substack, January 02, 2025 

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