The essence of public debt, as a financing institution, is that it allows the objective cost of currently financed expenditure projects to be postponed in time. For the taxpayer, public debt delays the necessity of transferring command over resource services to the treasury. —James M. Buchanan, “Confessions of a Burden Monger”
In this issue
October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends
I. Preamble: The Perils of a Credit-Financed Economy
II. Analyzing Fiscal Policy: A Critical Perspective of the Record Php 16.02 Trillion Public Debt
III. Why Public Debt Will Continue to Rise: The Continuing Burden of the Military and Uniformed Personnel Pension (MUP) System
IV. Pre-Election Labor Data? Declining Labor Participation Boosts Employment, While Agriculture Jobs Rise Despite Typhoons
V. Debt-Driven Consumption: The Risks of Unsustainable Household Borrowing
VI. Near Full Employment and Record Leverage, Yet a Tepid CPI Bounce in October: What Happened to Demand?
VII. Philippine Public Debt Hits Record Highs in October 2024: Rising FX and Fiscal Risks Ahead!
October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends
Philippine public debt hit a record Php 16.02 trillion last October. Here are the reasons why it is likely to maintain its upward trajectory.
I. Preamble: The Perils of a Credit-Financed Economy
This week’s outlook builds on last week’s exposition, "Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of 'Upper Middle-Income' Status."
But here’s a brief preamble that encompasses our economic analysis over time—dedicated to our new readers.
1 Spending reflects the ideology underpinning the Philippine approach to economic development.
2 This Keynesian-based framework has been built on a "top-down" or "trickle-down" model, relying on the elites and the government to drive growth.
3 Consequently, the nation's political and economic structures have been significantly shaped by this approach.
Figure 1
For instance, the elite owned universal-commercial banks have restructured their operations to prioritize consumer lending over industrial loans. Banks have also controlled 83.3% of the Total Financial Resources (TFR) as of September (or Q3). (Figure 1, top and middle charts)
4 A key outcome of this credit-driven spending is the historic savings and investment gap (SIG), manifested by the "twin deficits." These deficits reached unprecedented levels during the pandemic recession in 2020–2021, as the National Government and the Bangko Sentral ng Pilipinas (BSP) stepped in to rescue the banking system and protect elite interests. (Figure 1, bottom window)
5 Credit-financed private sector investments have also included speculative activities based on a "build it, and they will come" or "race-to-build supply" dogma. These activities span sectors such as real estate, infrastructure, construction, retail, and accommodations.
6 Since these deficits require substantial funding—and with the government, non-financial corporations (including PSEi-listed firms), and even banks now acting as net borrowers—households and external savings have become critical sources for bridging this economic gap.
7. In addition to the erosion of the peso's purchasing power, the depletion of savings is clearly reflected in the scale of financing requirements.
Figure 2
Even by mainstream measures, the nation’s gross savings rate has been on a downward trend since 2009, despite a brief two-year recovery in 2022 and 2023, from the lows of 2021. (Figure 2, topmost graph)
8. Trends in motion tend to stay in motion—until a crisis emerges.
Thus, it comes as no surprise that the serial expansion of systemic leverage—encompassing public debt and bank credit growth—has become the cornerstone of the "top-down" spending-driven GDP architecture.
II. Analyzing Fiscal Policy: A Critical Perspective of the Record Php 16.02 Trillion Public Debt
Bureau of Treasury, December 3: The NG's total outstanding debt stood at P16.02 trillion as of end-October 2024, reflecting a 0.8% or P126.95 billion increase from the end-September 2024 level. The increase was primarily driven by the valuation impact of peso depreciation against the US dollar from 56.017 at end-September 2024 to 58.198 at end-October 2024. Of the total debt stock, 67.98% is composed of domestic securities, while 32.02% consists of external obligations. (bold added)
Bureau of Treasury, October 1: The
National Government’s (NG) total outstanding debt stood at P15.55 trillion as
of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from
the end July 2024 level. This decline was primarily attributed to the
revaluation effect of peso appreciation and the net repayment of external debt (bold
added)
“Look,” the establishment analyst might argue, “strong revenues have led to a declining fiscal deficit, and consequently, increases in debt have also decreased.” (Figure 2, middle diagram)
We counter, "Yes, but that view is backward-looking." As economist Daniel Lacalle observed, "Deficits are always a spending problem because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increases every year."
That is to say, analyzing public balance sheets is more about theory than statistical analysis.
First, despite the hype surrounding the supposed ‘multipliers’ of deficit spending, diminishing returns are a natural outcome of political policies and are therefore unsustainable.
Why has Japan endured an era known as the "lost decades" if this prescription worked? And if public spending is so successful, pushing this reasoning with reductio ad absurdum logic, why not commit 100% of resources or embrace full socialization of the economy?
Second, as long as public spending rises—which is mandated by Congress—economic slowdowns or recessions magnify the risks of a fiscal blowout. The pandemic recession exemplifies this. (Figure 2, bottom image)
Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending.
Third, cui bono? Are the primary beneficiaries of spending not the political elites, bureaucrats, and the politically connected private sector? Without a profit-loss metric, there is no way to determine whether these projects hold positive economic value.
For instance, government fees from infrastructure projects do not reflect market realities but are often subsidized to gain public approval.
How much economic value is added, or what benefit does a newly erected bridge in a remote province or city provide relative to its costs?
Fourth, in a world of scarcity, government activities not only compete with the private sector but also come at its expense—resulting in the crowding-out effects.
Since the government does not generate wealth on its own but relies on extraction from the productive sectors, how can an increase in government spending not reduce savings and, therefore, investments?
Figure 3
Have experts been blind to the fact that these "fiscal stabilizers" or present-day "Marcos-nomics" stimulus have been accompanied by declining GDP? (Figure 3, topmost chart)
Lastly, who ultimately pays for activities based on "concentrated benefits and dispersed costs," or political transfers through the Logic of Collective Action?
Wouldn’t that burden fall on present day savers and currency holders or the peso (through financial repression—inflation tax) as well as future generations?
III. Why Public Debt Will Continue to Rise: The Continuing Burden of the Military and Uniformed Personnel Pension (MUP) System
A segment of the government’s October jobs report offers valuable insights into the trajectory of public spending.
The basic pay for personnel in the Philippine military or Armed Forces is higher than, or on par with, the salaries of top-tier positions in the private sector. (Figure 3, middle graph)
This is remarkable.
The data reflects the political priorities of the government.
After the overthrow of the Marcos 1.0 regime, the civilian government sought to pacify a restive military bureaucracy by granting pay increases and other benefits or perquisites.
The previous administration implemented across-the-board pay raises to maintain favor with the military.
These actions have contributed to significant excesses in the unfunded Military and Uniformed Personnel (MUP) pension system, which now poses an increasing risk of "fiscal collapse. The system’s unfunded pension liabilities are estimated at Php 9.6 trillion, equivalent to 53% of the Philippines’ gross domestic product (GDP).
Yet, even after the Department of Finance (DoF) proposed reforms in 2023 to address these issues, the reform bill remains pending in Congress and could remain unresolved due to internal dissent.
It goes without saying that the recent pay increases affirm a subtle transition to a war economy, which will be publicly justified in the name of "defense" or under the guise of "nationalism."
Yet, by setting pay scales higher than those in the private sector, the government have been prioritizing political appeasement over fostering the productive economy. This misalignment could lead to further erosion of the private sector.
Consequently, this egregious pay disparity may incentivize individuals to seek government employment over private-sector jobs, potentially crowding out labor from the productive economy.
These developments contradict the government’s stated goal of positioning the Philippines as a global investment hub.
Perhaps partly due to MUP operating under unprogrammed funding, public debt increases have risen disproportionately above public expenditures. (Figure 3, lowest image)
Needless to say, due to the protection of entrenched interest groups, public debt will continue to rise.
IV. Pre-Election Labor Data? Declining Labor Participation Boosts Employment, While Agriculture Jobs Rise Despite Typhoons
As an aside, authorities reported a slight increase in the unemployment rate, rising from 3.7% in September to 3.9% in October. Conversely, the employment rate declined slightly from 9.63% to 9.61%. Both figures remain close to the milestone rates of 3.1% and 9.69%, respectively, achieved in December 2023.
Figure 4
The increase in the employment rate, however, was driven by a drop in labor force participation. (Figure 4, upper visual)
Despite the population aged 15 and above increasing by 421,000 month-on-month (MoM) in October, the number of employed individuals decreased by 1,715,000, while the labor force shrank by 1,643,000.
The Philippine Statistics Authority (PSA) explains that the non-labor force population includes "persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability."
This highlights how arbitrary qualifications can inflate the employed population figures.
Interestingly, among the three major employment sectors, only agriculture recorded a MoM increase (+282,000). Industry (-48,000) and services (-1,950,000) both experienced significant declines. Of the 21 employment subcategories, only seven posted expansions, led by agriculture (+323,000), construction (+234,000), and accommodation (+163,000). (Figure 4, lower chart)
Notably, government and defense jobs saw a sharp drop of 358,000.
The near all-time highs in labor data appear to be strategically timed for the upcoming elections.
V. Debt-Driven Consumption: The Risks of Unsustainable Household Borrowing
Figure 5
On a related note, the BSP reported all-time highs in universal and commercial (UC) consumer lending last October, driven by credit card, auto, and salary loans in nominal or peso amounts. (Figure 5, topmost window)
Household borrowings surged with 23.6% year-on-year (YoY) growth, fueled by increases of 27.8%, 18.34%, and 18.5%, respectively. (Figure 5, middle graph)
This blazing growth rate has pushed the share of these loans in the bank’s portfolio to unprecedented heights.
This dynamic indicates that "banked" households have been steadily increasing their leverage to support consumption and, possibly, to refinance existing debt.
However, as the PSEi30’s Q3 data reveals, despite high employment rates and the rapid rise in household leverage, consumer spending remained sluggish.
This suggests three possibilities: wage growth has been insufficient to keep up with current price levels, households are increasingly reliant on debt to bridge the gap and maintain their lifestyles, or it is a combination of both factors.
Additionally, despite the BSP implementing a second rate cut, UC total bank lending growth showed early signs of slowing, decelerating from 11.32% in September to 10.7% in October.
Do these trends imply a productivity-driven or credit-driven economy?
At the current pace of unsustainable household balance sheet leveraging, what risks loom for consumers, the banking system, and the broader economy?
VI. Near Full Employment and Record Leverage, Yet a Tepid CPI Bounce in October: What Happened to Demand?
Still, despite near full employment, increases in household and production loans have failed to boost liquidity, savings, and inflation.
October M3 growth remained stagnant at 5.5% from a month ago.
Also, the October CPI rose marginally from 2.3% to 2.5%, while core inflation increased from 2.4% to 2.5% over the same period. (Figure 5, lowest chart)
Additionally, could the CPI be nearing its bottom?
Might this signal the onset of the third wave in the inflation cycle that began in 2015?
Will a fiscal blowout fuel it?
Figure 6
Ironically, what happened to the correlation between systemic leveraging and the CPI? While systemic leveraging has been rising since Q3 2024, the CPI has failed to recover since peaking in Q1 2023. (Figure 6, topmost pane)
Or, what happened to the record consumer leveraging, rising production debt, and near all-time highs in government spending? Why has demand slowed in the face of milestone-high systemic leveraging (public spending + bank credit expansion)?
Have the balance sheets of the private sector become a barrier to 'spending-based GDP'?
Intriguingly, while the government attributes the rise in the October CPI to typhoons (Typhoon Kristine and Typhoon Leon), which have caused price increases due to supply-side disruptions in food, jobs data indicate that such natural calamities have actually bolstered agricultural employment.
This possibly suggests a belief in the "broken window fallacy"—the misconception that growth can be driven by disasters or war!
These are incredible contradictions!
VII. Philippine Public Debt Hits Record Highs in October 2024: Rising FX and Fiscal Risks Ahead!
Circling back to the unparalleled Php 16.02 trillion debt, which—according to the BTr report—has risen due to the decline of the peso.
In contrast, when public debt declined last August, the improvement was also attributed to the strengthening of the Philippine peso.
While changes in the USDPHP exchange rate influence the nominal amount of public debt, the government continues to borrow heavily from both local and international capital markets. For instance, in Q3, the BSP approved state borrowings amounting to USD 3.81 billion. (Figure 6, middle image)
Following the surge in Q1 2023, foreign exchange (FX) borrowings by the public sector have continued to climb.
Moreover, since reaching a low of 28.12% in March 2021, the share of FX borrowings has been on an upward trend, with October’s share of 32.02% approaching May 2020's level of 32.13%. (Figure 6, lowest diagram)
This trend also applies to foreign debt servicing, as demonstrated last week, where FX-denominated servicing for the first ten months increased from 18.08% in 2023 to 21.9% in 2024.
In the face of fiscal stabilizers (deficit spending), the external debt of the Philippines continues to reach record highs in Q2, primarily due to state borrowings, which accounted for 57% of the total. Borrowing by banks and non-banks has also been on the rise. (Figure 7, topmost visual)
Debt levels in Q3 are likely to hit a new milestone given the approval of state FX loans by the BSP.
Inadequate organic FX resources—reflected in revenues and holdings—have led to "synthetic dollar shorts," as highlighted last November.
Meanwhile, the BSP appears to be rebuilding its FX reserves to restore the 85-88% range, which likely represents its USD anchor (de facto US dollar standard) for stabilizing the USDPHP exchange rate and domestic monetary operations. (Figure 7, middle image)
As of August, the BSP’s international reserves remain below this anchor level, as well as below its domestic security holdings. These holdings were used to inject a record Php 2.3 trillion to stabilize the banking system in 2020-2021.
While the liquidity injected remains in the system, it seems insufficient, as a 'black hole' in the banking sector appears to be absorbing these funds.
Compounding the issue, the lack of domestic savings to finance the widening savings-investment gap (SIG)—manifested through the "twin deficits"—necessitates more borrowing, both domestic and FX-denominated.
This deepening reliance on spending driven by the savings-investment gap increases the risk of a fiscal deficit blowout, accelerating the pace of debt accumulation
Because the establishment peddles the notion that links public debt conditions to the USDPHP exchange rate, the BSP has recently been intensively intervening to bring the exchange rate below the 59 level.
These interventions are evident in the 5.6% year-on-year drop in November’s gross international reserves (GIR), which fell to USD 108.47 billion—well below the Q2 external debt figure of USD 130.18 billion. (Figure 7, lowest graph)
Yet, the wider this SIG gap becomes, the greater the pressure on the government, the BSP, and the economy to borrow further to meet FX requirements.
