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

 

 

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

  

The government pretends to be endowed with the mystical power to accord favors out of an inexhaustible horn of plenty. It is both omniscient and omnipotent. It can by a magic wand create happiness and abundance. The truth is the government cannot give if it does not take from somebody—Ludwig von Mises 

In this issue

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

I. The GDP’s Critical Defects

II. The Mainstream Narrative is Failing

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption?

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP

XI. Summary and Conclusion

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen 

Q4 and 2024 GDP were another big miss for the establishment. Government spending played a pivotal role in boosting growth, while consumers were sidelined. There is little awareness that the former indirectly causes the latter 

I. The GDP’s Critical Defects 

Inquirer.net January 31, 2025: The Marcos administration missed its growth target for the second straight year in 2024, falling below consensus after the onslaught of destructive typhoons had muted the typical surge in economic activities during the holiday season. Gross domestic product (GDP), the sum of all products and services created within an economy, expanded at an average rate of 5.6 percent for the entire 2024, the Philippine Statistics Authority (PSA) reported on Thursday…At the same time, last year’s performance failed to meet market expectations after settling below the median estimate of 5.8 percent in an Inquirer poll of 12 economists…The statistics agency reported that GDP had expanded by 5.2 percent in the fourth quarter, unchanged from the preceding three months and lower than the year-ago print of 5.5 percent. That was also below the median forecast of 5.8 percent. 

Our preface: the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus or Marcos-nomics. 

Despite this, the Philippine GDP registered 5.2% in Q4 and 5.6% in 2024. 

Although GDP provides insight into how economic output is distributed across sectors—categorized by expenditure and industry—it does not present the equivalent allocation of spending by income class. 

Therefore, it is arguable that the headline figure makes a critically flawed assumption by suggesting that the statistical spending growth applies to the average. 

In other words, it assumes that the average citizen has experienced 5.2% growth in Q4 and 5.6% growth overall. The question, however, is how do you aggregate the spending of a few billionaires with that of those living in poverty? 

And this applies to the inflation deflator used to calculate the headline figure as well: How accurate is it to derive an average inflation rate from a mishmash of diverse spending items like a mobile gaming subscription, rice, and vehicle wheels? 

Apples and oranges, you say? Exactly.

If the nominal GDP and the deflator are flawed, why should we trust that the headline estimates reflect reality?

II. The Mainstream Narrative is Failing 

Every start of the year, mainstream experts proclaim at the top of their lungs that GDP will align with sanguine government targets. Some even tout the likelihood of the economy reaching "middle-income status."

Beyond abstract reasoning, they rarely explain the mechanics of how they arrive at their estimated figures.

Either they ignore the data provided by the Philippine Statistics Authority (PSA), or their forecasts are based on a 'pin-the-tail-on-the-donkey' approach—bluntly put, faith in magic.

What does the PSA data reveal?

Figure 1

It shows that since the post-pandemic recession, GDP has operated within a secondary trendline. This means that despite occasional growth spikes, GDP growth will be SLOWER than in the pre-pandemic era. (Figure 1, topmost pane)

Using the exponential trend as a gauge, we see that Q4 GDP consistently exceeds the trendline but eventually retraces to the secondary support in the following quarters.

The same dynamic applies to the 2024 GDP. (Figure 1, middle graph)

The point having been made, realize that for GDP to meet the mainstream's numbers, it would require a significant breakthrough not only to reclaim the pre-pandemic trend but also to sustain it.

From a statistical standpoint, none of this is happening. Even the PSA’s chart reinforces the notion of a slowing GDP. (Figure 1, lowest chart)

Figure 2 

As evidence, the government has struggled to wean itself off debt-financed pandemic deficits relative to GDP, which have served as a quasi-stimulus. Data reveals that they have become addicted to it. (Figure 2, topmost image) 

Why, then, do they yearn for pre-pandemic GDP figures? 

Incredible.

Statisticians-cum-economic experts often don't disclose that their perpetually optimistic forecasts might be about placating or bootlicking the government.

Why? For business and personal reasons. They might want to secure government contracts, underwrite debt issuance, intermediate stock trading, or gain accreditation as credit appraisers, among other things. On a personal level, they seek social desirability or good standing with officials for career advancement (revolving door politics), off-table deals, etc. In short: the principal-agent dilemma.

Essentially, overstating GDP or understating CPI numbers, or the mainstream's erroneous forecasts, come with no consequences for them—they have no "skin in the game."

However, for many in the investing public, consensus projections guide corporate strategies or investments in financial markets.

It’s unsurprising, then, that in addition to distortions in capital goods pricing due to stock market mispricing, overly optimistic guidance often leads to “build-and-they-will-come” debt-fueled malinvestments.

Many also invest their hard-earned savings in financial markets (stocks or fixed income) in the hope of achieving real or inflation-adjusted positive returns, without realizing that their investments are silently transferring wealth to politically connected economic elites, who are absorbing unsustainable amounts of debt.

And remember the inflation spike of 2022? NONE of these experts saw it coming.

In clear words, forecasts based on the principal-agent problem will likely keep the public blind to the escalating risks of a crisis.

Here's an example:

Businessworld, January 24: PROPERTY developers in the Philippine capital need to enhance their market research and consider lowering condominium prices to address the current “mismatch” between available units and buyer demand, according to property analysts. “These overpriced condos aren’t matching with the existing buyers…There are so many buyers, as in we’re talking millions of buyers, but the issue is they cannot afford [a condo in Metro Manila] anymore” (bold added) 

The mainstream’s narrative is failing: Expect more to come. 

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption? 

Let's conduct a brief investigation into the PSA's GDP data. 

The government's statistics are riddled with paradoxical figures.

First, the government claims that the employment rate (as of November) has reached nearly its highest level. (Figure 2, middle chart)

Curiously, with low savings, how have entrepreneurs managed to fund investments in real businesses, leading to near-full employment?

FDI numbers hardly support this. Despite a spike in October, the 10-month FDI flow was up by only 6.6%, with 68% of those inflows coming from debt. Debt inflows are no guarantee of “investment.”

The likely source of funds might be from banking loans. Over an 11-month period, consumer credit captured the largest share of the net increase in Universal-Commercial Bank loans at 23%, followed by real estate at 18.74%, electricity at 9.72%, and retail trade at 9.52%.

However, retail and agriculture, which account for the largest shares of the working population at 21.3% and 20% respectively, suggest a different story.

Next, fueled by credit cards and salary loans, consumer credit continues to grow at a breakneck pace, setting nominal records consecutively. (Figure 2, lowest graph)

Ironically, despite full employment and unprecedented consumer credit growth, Q4 2024 saw real consumer spending in GDP terms increase by only 4.7%, similar to Q2 and marking the second lowest since Q2 2011, excluding the period of the pandemic recession.

Stagnating household consumption was a key factor in pulling down the period's GDP.

Moreover, household GDP mirrored the deceleration in Q4 2024, with consumer per capita GDP growth at just 3.8%—the lowest since Q3 2017.

Important questions arise: 

-Where did all that record bank credit expansion go?

-How much of the consumer credit growth has been about refinancing existing debt?

-If productivity has been driving the GDP, why would a nation with full employment experience a sustained slowdown in household consumption?

In this context, government data on employment appears questionable.

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

Figure 3

What’s more, households are struggling with consumption, mainly due to the inflation tax, which continues to erode their spending power. At the same time, they are using leverage to maintain their lifestyles. As this occurs, retail GDP continues to outgrow consumer spending. (Figure 3, topmost window)

Partly due to the mainstream’s constant cheerleading, retail entrepreneurs are hopeful that the consumption slump will reverse soon, and so have been aggressively expanding capacity. Retail GDP grew by 5.5% in Q4 and has outpaced consumer spending in 3 of the last 4 quarters. (Figure 3, second to the highest image)

Or, to put it simply, because of the mainstream belief in the 'build it and they will come' dogma, supply continues to outpace demand.

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

In the meantime, news reports that "the House Committee on Labor and Employment has approved a bill for a P200 across-the-board legislated wage hike."

Would this not function as a form of redistribution or a protective moat in favor of elite companies, at the expense of micro, small, and medium enterprises (MSMEs)? How would this incentivize grassroots entrepreneurship when authorities are effectively raising the cost of doing business or barriers to entry?

How would minimum wage laws not negatively impact consumption and productivity while acting as a drain on savings?

Quoting economist Thomas Sowell, "Minimum wage laws play Russian roulette with people who need jobs and the work experience that will enable them to rise to higher pay levels." (Sowell, 2006)

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

And there’s more. How does the 5.2% GDP square with polls showing record highs in consumer stress: "Self-Rated Poverty at 63%, highest in 21 years" and "December 2024 hunger was… at the highest level since the record high 30.7% during the COVID-19 lockdowns in September 2020"? (Figure 3, second to the lowest and lowest charts)

While the government touts the 5.2% GDP, SWS found that 63% of Filipino families rated themselves as "Poor," while "25.9% of Filipino families experienced involuntary hunger."

Simply put, this reflects popular sentiment about inflation: a vast majority of the population feels harried by the peso’s loss of purchasing power, and a quarter of them have actually experienced hunger.

Incredible.

So, who is overstating their data—SWS or the government?

Here’s the thing: If the GDP growth is based on unsustainable leveraging, what would the ramifications be?

Or if consumer balance sheets have been burdened by excessive gearing (spend-now, pay-later) to cope with inflation, how would this affect the economy?

When consumers reach the proverbial tipping point of leveraging and begin to scale down, wouldn't this slow the GDP? Wouldn't credit delinquencies rise, affecting the banks' already strained liquidity?

Or, wouldn’t this reduce lending, exacerbating liquidity pressures in the banking system and increasing defaults?

Could this not lead to rising unemployment, creating a feedback loop that slows GDP, decelerates bank lending, and drives up credit delinquencies?

By the same token, what happens to the supply side’s debt-financed overcapacity? Wouldn’t this worsen pressures on unemployment, output, consumer spending, and negatively affect the health of the banking industry?

Wouldn't increasing sentiments of hunger and perceptions of poverty not lead to higher risks of social disorder? 

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction 

If household consumption weighed down the GDP, which sectors propelled it upwards?

Figure 4

From the expenditure side of the data, the answer is the government, construction, and export services. 

Government GDP rose from 5% in Q3 to 9.7% in Q4. While construction GDP dipped from 8.8% to 7.8%, it still exceeded the 5.2% threshold. Private sector construction, driven by households (12.8%) and corporations (5.7%), powered the sector’s GDP, while government construction GDP stagnated at 4.7%. (Figure 4 topmost diagram)

Interestingly, while exports of goods entered a recession, declining by -0.37% in Q3 and -4.6% in Q4, services exports GDP surged from 2.3% to 13.5%, elevating the sector's performance from -1.4% in Q3 to 3.2% in Q4. (Figure 4 middle image) 

Curiously, real estate services firm CBRE reported in 2024 that "32 percent of vacated (office) spaces are from the IT-BPM sector." Why have service export firms like BPOs been downsizing if their businesses were reportedly booming, as suggested by the GDP figures? 

Meanwhile, gross capital formation fell sharply from 13.7% in Q3 to 4.1% in Q4, while durable goods GDP also plunged from 7.9% to just 0.1%. Unfortunately, this indicates a sluggish state of investments, which contrasts with the employment data. 

The expenditure side of the GDP shows that government spending was primarily responsible for the Q4 GDP boost, supported by services exports and private sector construction. However, it also reveals that while consumer spending has stagnated, capital spending has languished. 

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors 

On the industry side, sectors like transport (9.5%), financial and insurance (8.5%), professional and business services (8.3%), public administration and defense (7%), education (6.2%), and health (12.1%) all grew above the GDP rate. 

Or, to put it another way, outperforming government and related sectors contributed about 10% of the industry's GDP. 

After the 2020 spike, the share of public administration and defense in GDP remains elevated compared to pre-pandemic levels. This should come as no surprise, as the government is focused on centralization, partly driven by a subtle shift toward a war economy. (Figure 4 lowest graph)

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

Figure 5

On the other hand, despite showing signs of a slight slowdown in Q4 2024, the financial and insurance sector's contribution to national GDP continues to expand. (Figure 5, upper chart) 

It's not coincidental that the sector's improvements coincided with the BSP's unprecedented sector rescue in 2020. Since then, the sector's growth has not looked back, even as the BSP raised interest rates. That is, the sector’s GDP suggests that there was no tightening at all. 

In Q4, banks accounted for 49% of the sector's GDP, while non-banks and insurance had respective shares of 32% and 13.33%. These sectors posted GDP growth rates of 8%, 8.4%, and 8.2%, respectively. 

Yet the paradox lies in the sector's dependence on the real economy, as it lends and invests to generate profits and contribute value to GDP. 

Real estate, trade (primarily retail), and manufacturing are among their largest borrowers, accounting for 40% of total bank lending as of last November. 

Lending to the financial sector itself accounted for a 7.7% share, which together with the aforementioned sectors, totals 48.5% of all bank loans (from universal commercial, thrift, and rural banks). 

Incidentally, these sectors are also significant contributors to the GDP, making up a 42.7% share of the national GDP. Including the financial sector, the aggregate GDP increases to 52.5%. 

Aside from retail, the manufacturing sector posted a real GDP growth of 3.1%, while real estate GDP materially slowed to 3.0%, pulling its share of the national GDP to an all-time low! (Figure 5, lower diagram) 

We previously discussed the sector's deflationary spiral, and the Q4 decline could signal further price drops in the sector. 

To illustrate the struggles of the manufacturing sector, JG Summit announced the shutdown of its Petrochem business last week, in addition to the goods export recession in Q4. 

To summarize, the Philippine GDP and bank lending exposure reveal an increasingly fragile economy heavily dependent on a few sectors, which have been buoyed by bank credit. This means that the higher the concentration risks, the greater the potential impact of an economic downturn. 

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP 

Another piece of evidence that consumer spending has been slowing can be found in the food and accommodation sectors' GDP. 

The authorities' response to the pandemic with economy-wide shutdowns initially pushed Food GDP into an upward spiral, while the reopening triggered a "revenge travel" GDP surge in the accommodation sector. 

However, the massive distortions caused by these radical political policies have started to unwind.

Figure 6

Accommodation GDP slowed from 12.2% in Q3 to 8.7% in Q4, while food GDP dropped from 10.1% to 4.9%. Since food accounts for a large portion (68%) of the sector, the overall GDP for the sector moderated from 10.7% to 6.1%. (Figure 6, topmost and middle charts) 

The distortions caused by pandemic policies have led many investors to believe that the 'revenge travel' trend, or the recovery streak in tourism, will continue, fueling massive investments in the sector. 

In our humble opinion, they have critically misread the market, as the growth rate of foreign tourist arrivals has substantially slowed in 2024. (Figure 6, lowest image) 

Moreover, the sector's declining GDP further highlights the weakening of domestic tourism. 

XI. Summary and Conclusion 

1 Q4 and 2024 have reinforced the secondary trendline in GDP, continuing to show a slowdown in GDP growth.

2 Dwindling consumer spending has been a critical factor driving this slowdown.

3 Importantly, capital spending growth has also been lackluster.

4 Conversely, government spending has provided crucial support to GDP, along with contributions from other ancillary sectors.

Yet, these dynamics reveal that the Philippines operates under the flawed assumption of political "free lunches" — where government spending is seen as having only a positive impact, while ignoring the negative effects of the crowding out syndrome. 

They also highlight the pitfalls of the BSP's 'trickle-down' policies, which have deepened concentration risks due to the bank-dependent financing of a few sectors. 

It’s no surprise, then, that after the initial easing by the BSP in the second half of the year — which contributed to the dismal Q4 GDP, the January 2025 PSEi 30 crash and rising bond yields, the BSP proposes to continue the same strategy, slashing rates by 50 basis points and reducing reserve requirements by 200 basis points. 

Succinctly, they are "doing the same thing and expecting different results."

____

references 

Thomas Sowell, A Glimmer of Hope August 08, 2006, realclearpolitics.com