The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

 

There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable—Milton Friedman  

In this issue

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support

II. Why Then the Surprise?

III. The Echo Chamber: Forecasting as Optimism Theater

IV. Statistics ≠ Economics: The Public’s Misguided Faith

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

VII. So What Happened to Q3 GDP?

VIII. Household Per Capita: The Downtrend

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

XIII. Increasing Influence of Public Spending in the Economy

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb

XV. Statistical Mirage: Base Effects and the GDP Deflator

XVI. Testing Support: Fragility in the Data, Institutional Silence

XVII. Overstating GDP via Understating the CPI

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus

XXII. More Easing? The Rate-Cut Expectations Game

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics

XXIV. Conclusion: Crisis as the Only Reform 

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t 

Behind the typhoon-and-scandal headlines lies the real story: a shocked consensus, overstated aggregates, expanded stimulus, and a political economy running on malinvestment.

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support 

The Philippine government announced that Q3 GDP growth slumped to a mere 4%, the slowest pace since the pandemic recession. This came as a ‘shock’ to mainstream forecasters, who had projected a modest deceleration—not a plunge. 

Statistics must never be viewed in isolation. This GDP print must be seen in context. Q3 unfolded amid a deepening BSP easing cycle—six rate cuts (with a seventh in October or Q4), two RRR reductions, and a doubling of deposit insurance coverage. 

This stimulus-driven environment was reinforced by all-time-high bank lending, particularly in consumer credit, even as employment—though slightly weaker—remained near full employment levels. 

In short, Q3 growth occurred under the most accommodative financial and fiscal conditions in years—a cauldron of policy backstops. 

II. Why Then the Surprise? 

Forecasting errors were not only widespread—they were flagrant. 

Reuters called the result “shocking,” citing a corruption scandal linked to infrastructure projects that hammered both consumer and investor confidence. The report noted that growth came in “well below the 5.2% forecast in a Reuters poll and significantly weaker than the 5.5% expansion in the previous quarter.” 

BusinessWorld’s survey of 18 economists yielded a median forecast of 5.3%.

Philstar’s poll of six economists projected 5.45%, barely below Q2’s 5.5%. 

A 50-bps drop was labeled a ‘slowdown’? Really? 

That’s not analysis—it’s narrative management. 

Why such a brazen forecasting error? 

III. The Echo Chamber: Forecasting as Optimism Theater 

The DBM chief claimed that Q4 growth would “normalize,” insisting that the 5.5–6.5% full-year target “remains attainable.” 

Implicit in that projection was a soft but stable Q3—a forecast that proved disastrously optimistic. 

This consensus blindness mirrors past failures: the Q1 2020 COVID shock and the 2022 inflation spike. 

This isn’t ideological—it’s institutional. Forecasts aren’t tools for analysis; they are marketing vehicles for official optimism. Economic statistics are not used to diagnose, but to promote and reassure. 

Hence the futility of “pin-the-tail-on-the-donkey” forecasting: a guessing game played on deeply flawed metrics. 

IV. Statistics ≠ Economics: The Public’s Misguided Faith 

Statistics is NOT economics. 

Despite repeated misses, the public continues to cling to mainstream forecasts. They fail to see the incentive mismatch—institutions seek fees, commissions, and access, while individuals seek returns. 

Agency problems, asymmetric information, and lack of skin in the game define this relationship—core realities that mainstream commentary refuses to admit. 

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

Figure 1 

Take Philippine Seven Corp. [PSE: SEVN]. In Q3: 

• Revenue rose just 3.8% YoY, its weakest since Q1 2021.
• Same-store sales contracted 3.9%, the worst since the pandemic.
• Store count rose 8.6%, yet total sales fell—signaling demand erosion. 

This downtrend, persisting since 2022, mirrors the slowdown in real retail and household consumption GDP, which posted 5.1% and 4.09% in Q3, respectively. (Figure 1, topmost and middle windows) 

Yet the gap between SEVN’s data and official GDP implies potential overestimation in national accounts. 

If major retail chains show a sustained slowdown or outright contraction, then headline consumption growth of 4–5% either overstates economic reality—or implies that GDP should be even weaker than reported. 

These trend declines offer a structural lens into the economy’s underlying deterioration. 

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

The consumer slowdown did not emerge from the corruption scandal or recent natural calamities (earthquakes and typhoons)—it preceded both. The underlying weakness has long been visible to anyone looking beyond the official narrative. 

While economists missed the turn, sentiment data didn’t. 

The SWS hunger survey—a proxy for household stress—proved a far better leading indicator. Its late-September spike revealed deepening hardship among lower- and middle-income Filipinos—mirroring the Q3 GDP plunge. (Figure 1, lowest graph) 

Like SEVN’s revenue and the deceleration in consumption and retail GDP, hunger is not an anomaly—it’s a trend. One that has persisted since the pandemic and now appears to be accelerating.

Figure 2

With CPI steady at 1.4% for two consecutive quarters—assuming the number’s accuracy—the malaise clearly extends beyond price pressures. 

The hunger dilemma reflects deeper economic deterioration: slowing jobs, stagnant wages, weak investments, falling earnings, declining productivity, and eroding savings. (Figure 2, topmost image) 

This is the institutional blind spot—prioritizing political and commercial relationships over truth. 

VII. So What Happened to Q3 GDP? 

Aside from back-to-back typhoons, officials attributed the unexpected slowdown to concerns over the integrity of public spending and further erosion of investor sentiment. 

And it was not just investors. According to Philstar, the DEPDEV (Department of Economy, Planning, and Development) chief said consumer confidence has also been hit by the flood control probes, with many households postponing planned purchases. 

But unless there has been a call for nationwide civil disobedience (à la Gandhi or Etienne de La Boétie), why should people’s daily consumption habits suddenly be affected by politics? 

The reality is more complex. Universal commercial banks’ household loan portfolios surged 23.5% in Q3 2025—marking the 13th consecutive quarter of 20%+ growth. If households weren’t spending, what were they doing with interest-bearing loans? Investing? Speculating? Or simply refinancing old debt? (Figure 2, middle chart) 

VIII. Household Per Capita: The Downtrend 

Meanwhile, real household per capita consumption grew just 3.2%, its lowest since the BSP-sponsored recovery in Q2 2021. This wasn’t an anomaly—it reflected a downtrend in household spending growth since Q1 2022. (Figure 2, lowest visual) 

In short, the corruption scandal was not the root cause but an aggravating circumstance layered atop an existing structural slowdown. 

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

Let us look at the real Q3 2025 expenditure trend, and how it compares with recent periods. 

Q3 2025 (4% GDP):

• Household spending: +4.1%
• Government spending: +5.8%
• Construction spending: –0.5%
• Gross capital formation: –2.8%
•  Exports: +7%
• Imports: +2.6%

Q2 2025 (5.5% GDP): 

• Household spending: +5.3%
•  Government spending: +8.7%
• Capital formation: +1.2%
• Construction: +0.9%
• Exports and imports: +4.7%, +3.5%

Q3 2024 (5.2% GDP): 

• Household spending: +5.2% 
• Government spending: +5%
• Capital formation: +12.8%
• Construction: +9%
• Exports and imports: –1.3%, +6.5%

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion 

Despite the corruption scandal, government consumption remained positive and was even higher in Q3 2025 than in Q3 2024. This alone undermines the narrative that the GDP slump was simply "sentiment shock."

Figure 3

Government construction plummeted 26.6%, matching the pandemic lockdown era of Q3 2020. This single line item pulled construction GDP into a mild –0.5% decline. (Figure 3, topmost pane) 

But buried beneath the headline, private construction was strong:

• Private corporate construction: +14.4%
• Household construction: +13.3%

These robust figures cushioned the damage from the government crash.

Absent private-sector strength, construction GDP would have mirrored the government collapse. 

Government construction also contracted –8.2% in Q2, reflecting procurement restrictions during the midterm election ban. 

As we already noted last September: (bold original) 

"Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity."

"Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness." 

The Q3 data has now validated this. 

A large network of sectors tied to public works absorbed the first-round impact—and that ‘shock’ bled into already stressed consumers. 

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing 

Exports rose +7% in Q3 2025, boosted by front-loading ahead of Trump tariffs. 

Imports slowed to +2.6%, the weakest pace in recent periods, reflecting consumer retrenchment. 

This divergence highlights how external momentum was artificially timed, while domestic demand faltered.

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

The controversial flood control scandal represents the visible tip of a much deeper corruption iceberg. It is not the anomaly—it is the artifact. 

Political power is, at its core, about monopoly. 

In the Philippines, political dynasties are merely its institutional symptom. The deeper question is: what incentives drive politicians to cling to power, and how do they sustain it? 

Public service often serves as a facade for the real intent: access to political-economic rents, impunity, and the machinery of patronage. Through electoral engineering—name recall, direct and indirect (policy-based) vote-buying, and bureaucratic capture—politicians commodify entitlement, turning public goods into tradable favors.

Dependency is weaponized or transformed into political capital, politicizing people’s basic needs to secure loyalty, votes, and tenure. 

Poverty becomes leverage. 

This erodes the civic ethic of self-reliance and responsibility, and it traps constituents—who participate out of a survival calculus—into legitimizing dynastic monopolies. 

This free-lunch electoral process, built on deepening dependence on ever-growing public funds, represents the social-democratic architecture of a political economy of control, centralization, and extraction—one that incentivizes corruption not as an aberration but as a structural outcome of concentrated power. 

XIII. Increasing Influence of Public Spending in the Economy 

Direct public spending reached 16.1% of 9M 2025 real GDP—the second highest on record after the 2021 lockdown recession.  (Figure 3, middle diagram) 

This figure excludes government construction outlays and the spending of private firms reliant on state contracts and agency revenues, such as PPPs, suppliers, outsourcing, etc. 

In this context, corruption is not merely a moral failure but a symptom of structural defects in the political-economic electoral process, reinforced by the misdirection of resources and finances, which signifies chronic systemic malinvestment. 

GDP metrics mask political decay, economic erosion, and institutional fragility. 

Yet even with statistical concealment, the entropy is visible. 

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb 

The ever-rising share of public spending has coincided with a slowdown in GDP growth. Public outlays now prop up output, while pandemic-level deficits have shrunk the consumer share of GDP. (Figure 3, lowest graph) 

Crowding-out effects, combined with “build-and-they-will-come” malinvestments, have drained savings and forced greater reliance on leverage—weakening real consumption.

Figure 4 

Most alarming, nominal public debt rose Php 1.56 trillion YoY in September, equivalent to 126% of the Php 1.237 trillion increase in nominal GDP over the same period. 126%! (Figure 4, topmost visual) 

As a result, 2025 public debt-to-GDP surged to 65.11%—the highest since 2006. (Figure 4, middle graph) 

Needless to say, Corruption is what we see; malinvestment is what drives the crisis path. 

XV. Statistical Mirage: Base Effects and the GDP Deflator 

Yet, the “shocking” Q3 GDP overstates its actual rate. 

Because the headline GDP growth rate is derived from statistical base effects, almost no analyst examines the underlying price base, which is the most critical determinant of real GDP. The focus is always on the percentage change—never on the structural level from which the change is computed. 

For years, the consensus has touted the goal of “upper middle income status,” equating progress with high GDP numbers. 

But whatever outcome they anticipate, the PSA’s nominal and real GDP price base trends have consistently defied expectations. (Figure 4, lowest chart) 

The primary trend line was violated during the pandemic recession and replaced by a weaker secondary trend line. Statistically, this guarantees that base-effect growth will be slower than what the original trajectory implied. 

The economy is no longer expanding along its pre-pandemic path; it is merely oscillating below it. 

XVI. Testing Support: Fragility in the Data, Institutional Silence 

Recent GDP prints have repeatedly tested support levels. The risk is not an upside breakout but a downside violation—the path consistent with a recession.   

Q3 GDP brought both the nominal and real price base to the brink of its crucial support. A further slowdown could trigger its incursion. 

Yet you hear none of this discussed—despite all this coming straight from government data. 

The silence underscores a broader indictment: statistics are deployed as optimism theater, not as diagnostic tools. 

XVII. Overstating GDP via Understating the CPI 

And this brings us to a deeper issue that amplifies the problem. 

Real GDP is computed by dividing nominal GDP by the implicit GDP deflator. For the personal consumption component, the PSA uses CPI-based price indices to adjust nominal household spending.

Figure 5

The implicit price index is technically the GDP deflator. (Figure 5, topmost diagram) 

If CPI becomes distorted by widespread price interventions—such as MSRPs, the Php 20-rice rollout, or palay price floors—its measured inflation rate can diverge from actual market conditions. 

Any downward bias in CPI would mechanically lower the corresponding deflators used in the national accounts. 

A lower deflator raises the computed real GDP. 

Thus, even without access to PSA’s internal methodology, the basic statistical relationship still holds: systematic price suppression in CPI-tracked goods would tend to understate the deflator and, in turn, overstate real GDP. 

As noted in our August post: (bold & italics original) 

"Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater.  

"Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics.  

"The illusion of growth props up the illusion of competence. And both are running on borrowed time.  

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality 

The GDP headline may be overstating growth due to deviations in calculation assumptions or outright political agenda— what I call as "benchmark-ism." 

Consider the revenues of the Top 4 listed developers—SM Prime, Ayala Land, Megaworld, and Robinsons Land. 

Despite abundant bank credit flowing to both supply and demand sides, their aggregate revenues increased only 1.16% in Q3 2025, barely above Q2’s 1.1%. This mirrors the slowing consumer growth trend: since peaking in Q2 2021, revenue growth rates have been steadily declining, leading to the current stagnation. The slowdown also coincides with rising vacancies. Reported revenues may still be overstated, given that the industry faces slowing cash reserves alongside record debt levels. 

Meanwhile, official GDP prints show:

• Real estate nominal GDP: +6.8%
• Real estate real GDP: +4.7% 

Yet inflation-adjusted revenues for the Top 4 translate to zero growth—or contraction. 

Their revenues accounted for 26.4% of nominal real estate GDP in Q3 2025. Real estate’s share of national GDP was 6.2% nominal, 6% real. (Figure 5 middle image) 

This gap between corporate revenues and GDP aggregates suggests statistical inflation of output. 

This highlights a broader point: The industry’s CPI barely explains the wide divergence between revenues and GDP. And this is just one sector. 

Comparing listed company performance with GDP aggregates exposes the disconnect between macro statistics and micro realities, not just episodic shocks—a motif that recurs across retail, consumption, and sentiment indicators. 

Yet, natural calamities—especially typhoons—are often blamed, but their impact on national output is minimal—much like the weak revenue trends, the real slowdown lies deeper than headline statistics suggest. 

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

Despite public perception, the Philippine economy has been structurally resilient to typhoon disruptions—not because disasters are mild, but because GDP barely registers them. 

In Q3 2025, ten tropical cyclones passed through or enhanced the monsoon system, with the July cluster (Crising, Dante, Emong + Habagat) causing an estimated Php 21.3 billion in officially reported damages and the September cluster (Nando/Ragasa, Bualoi/Ompong + Habagat) adding another Php 1.9 billion in infrastructure and agricultural losses. 

The combined Php 23.1 billion destruction sounds enormous, but in macroeconomic terms it is equal to just 0.37% of quarterly nominal GDP. 

This pattern is consistent with past experience: Yolanda (Q4 2013, 5.4%), Odette (Q4 2021, 7.9%), Ompong (Q3 2018, 6.1%), Pablo (Q4 2012, 7.8%), and Glenda (Q3 2014, 5.9%) all inflicted large localized damage yet barely dented national output. (Figure 5, Table) 

The reason is structural: GDP is weighted toward services and urban economic activity, while disasters strike geographically narrow areas. Catastrophic in human terms, typhoons seldom materially affect national accounts. 

The Q3 2025 storms fit the same pattern: human tragedy, fiscal strain, and regional losses—but minimal macroeconomic imprint. Resilience in the data conceals suffering on the ground, because GDP measures transactions, not destroyed livelihoods. 

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy 

Given this historical consistency, attributing the Q3 slowdown to typhoons is politically convenient but analytically weak. It reflects self-attribution bias—positive outcomes are claimed as accomplishments, negative ones pinned on exogenous forces. 

GDP simply does not respond to weather shocks of this scale. At most, calamities intensify pre-existing consumption weakness rather than create it. They add entropy to a deteriorating trend; they do not determine it. 

The same applies to earthquakes. The deadly July 1990 Luzon earthquake claimed over 1,600 lives and caused Php 10 billion in damage, yet Q3 1990 GDP posted +3.7% growth. The slowdown that followed led to a technical recession in Q2 (-1.1%) and Q3 1991 (-1.9%), driven more by political crisis (coup attempts, post-EDSA transition) and the US recession (July 1990–March 1991) than by the quake itself. 

Recovery spending from calamities gets factored into GDP, but as Frédéric Bastiat taught us, this is the broken window fallacy—a diversion of resources, not genuine growth. 

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus 

The administration has relied on this same narrative today. 

The cited calamities—Typhoon Tino and Uwan, plus the Cebu and Davao earthquakes—occurred in Q4 2025. These events contributed to entropic consumer conditions but did not create them. 

But their political and bureaucratic timing proved useful. 

Authorities tightened the national price freeze a day before the USD/PHP broke 59 (see reference discussion on the USDPHP breakout) 

Typhoon Tino, followed by Uwan, justified declaring a State of Nationwide Calamity for one year—the longest fixed-term declaration in Philippine history. (By comparison, the COVID-era State of Calamity lasted 2.5 years due to repeated extensions.) 

This one-year window: 

• Reinforces the price freeze, aggravating distortions.
• Enables liberalized public spending under relief and rehabilitation cover.
• Allows budget realignments, procurement exemptions (RA 9184 Sec. 53[b]), calamity/QRF access, and inter-agency mobilization (RA 10121). 

In effect, the national calamity declaration acts as a workaround to the spending constraints imposed by the flood-control corruption scandal. It restores fiscal maneuvering room under the guise of emergency relief and rehabilitation. 

This is emergency Marcos-nomics, designed to lift headline GDP via public-sector outlays—on top of pandemic-level deficits, easy-money liquidity, and the FX soft-peg regime. 

XXII. More Easing? The Rate-Cut Expectations Game 

Layered onto this is the growing consensus expectation of a jumbo BSP rate cut in November. One must ask: 

• Are establishment institutions applying indirect pressure on the BSP?
• Or is the BSP conditioning the public for an outsized cut to stem a crisis of confidence? 

Both interpretations are possible—and neither signals macro-stability. 

Meanwhile, supermarkets warn that “noche buena” food items may rise due to relief-driven demand—a symptom of distortions. 

This is the predictable byproduct of a price-freeze regime: shortages, hoarding, cost-pass-through, and black-market substitution.

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics 

At worst, emergency stimulus during a slowdown widens the deficit and accelerates fiscal deterioration—pushing the economy toward the fiscal shock we warned about in June: 

"Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026.  

"If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate."

Figure 6 

Market behavior is already signaling intensifying stress: the USDPHP and the PSE remain under pressure despite repeated rescue efforts. (Figure 6) 

XXIV. Conclusion: Crisis as the Only Reform 

A political-economic crisis—a black swan event—doesn’t happen when expected. It occurs because almost everyone is in entrenched denial and complacency, blinded by past resilience. Like substance abuse, they believe unsustainable events can extend indefinitely: It hasn’t happened, so it won’t (appeal to ignorance). 

But history gives us a blueprint: 

economic strains → political tensions → revolution/reforms

• EDSA I followed the 1983 debt crisis.
• EDSA II followed the 1997 Asian Financial Crisis.

Economic strains were visible even before the flood-control scandal. This is Kindleberger’s and Minsky’s late-cycle phase: swindles/fraud/deflacation emerge when liquidity thins, growth slows, tenuous relationships and political coalitions fracture. 

More improprieties—public and private—will surface as slowing growth exposes hidden malfeasance, nonfeasance, and misfeasance. 

The sunk-cost architecture of vested interests, built on free-lunch trickle-down policies, points to a grand finale: either EDSA 3.0 or a putsch. 

A crisis, not politics, will force change. 

To repeat our conclusion last October, 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable.  

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II.  

____

References

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

Prudent Investor Newsletter, The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy, Substack, August 10, 2025 

Prudent Investor Newsletter, Is the Philippines on the Brink of a 2025 Fiscal Shock? Substack, June 08, 2025

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

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025

  

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

 

Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!, confidence collapses, lenders disappear, and a crisis hits—Carmen Reinhart and Kenneth Rogoff 

In this Issue 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth

III. The Pandemic Rescue Template Returns, The MSME Credit Gap

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design

V. Treasury Market Plumbing: Who Really Benefits?

VI. Crowding Out: Corporate Issuers in Retreat

VII. The Free Lunch Illusion: Debt and Servicing Costs

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

X. Conclusion: Goldilocks Faces the Three Bad Bears 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning 

The Bangko Sentral ng Pilipinas’ latest rate cut is a "Goldilocks" illusion masking a late-cycle reckoning driven by crowding out, surging leverage, and mounting stress in the financial system 

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion 

Reinforcing its "easing cycle," the Bangko Sentral ng Pilipinas (BSP) cut policy rates last week—the sixth reduction since August 2024. Officials claimed they had reached a “sweet spot” or “Goldilocks level”—a rate neither inflationary nor restrictive to growth, as the Inquirer reported. 

We’ve used “sweet spot” before, but not as a compliment. In our framing, it signals ultra-loose monetary policy—part of a broader “Marcos-nomics stimulus” package that fuses fiscal, monetary, and FX regimes into a GDP-boosting mirage. A rescue narrative sold as reform. 

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth 

The idea that “low rates equal growth” has calcified into public gospel. 

But if that logic holds, why stop at 5%? Why not abolish interest rates altogether—and for good measure, tax 100% of interest income? By that theory, we’d borrow and spend our way to economic utopia. In short: Such (reductio ad absurdum) logic reduces policy to absurdity: prohibit savings, unleash debt, and expect utopia.

Figure 1

The BSP insists its decisions are data-driven. But have they been? Since the 1998 Asian Crisis, rate cuts have been the default posture. 

And since the 2007–2009 Global Financial Crisis, each successive cut has coincided with slowing headline GDP—through the pandemic recession and beyond. The decline was marginal at first, barely noticed. But post-pandemic, the illusion cracked. (Figure 1 upper pane)

A historic rescue package—Php2.3 trillion in injections, rate cuts, RRR reductions, a USD-PHP soft peg, and sweeping relief measures—combined with unprecedented deficit spending, triggered a temporary growth spike. This extraordinary intervention, combined with global reopening, briefly masked structural weaknesses. 

But since 2021, GDP has resumed its downward drift, with the deceleration becoming conspicuous through Q2 2025. Inflation forced the BSP to hike rates, only to restart its easing cycle in 2024. 

So where is the evidence that low rates boost the economy?

III. The Pandemic Rescue Template Returns, The MSME Credit Gap 

Today’s “sweet spot” eerily mirrors the pandemic-era rescue template—minus the direct injections and relief measures. For now. 

Meanwhile, over half the population still self-identifies as borderline or poor (self-rated poverty surveys—SWS and OCTA). 

GDP, as a measure, fails to capture this disconnect—possibly built on flawed inputs, questionable categorization and assumptions, as well as politically convenient calculations. 

Meanwhile, the BSP’s easy money regime and regulatory bias have allowed banks to monopolize the financial system, now accounting for 83% of total financial assets as of Q2 2025. (Figure 1, lower graph) 

Yet MSMEs—the backbone of employment at 67% (as of 2023, DTI)—remain sidelined. 

Ironically, Republic Act No. 9501 mandates banks to lend 10% of their portfolio to MSMEs (8% to micro and small, 2% to medium enterprises).

Figure 2

But compliance has collapsed—from 8.5% in 2010 to just 4.63% in Q1 2025. (Figure 2, topmost image) 

Banks, unable to price risk appropriately, prefer paying penalties over lending to the sector. The result: the credit boom inflating GDP primarily benefits 0.37% of firms—the large enterprises that employ only a third of workers. 

While RA 9501 mandates banks to allocate 10% of their loan portfolio to MSMEs, BSP regulations restrict risk-based pricing—directly through caps on consumer and financing loans (BSP Circular 1133) and indirectly in MSME lending through microfinance rules (Circulars 272, 364, 409, and related issuances).   

Again, unable to fully price in higher default risks, banks often find it cheaper to pay penalties than to comply. 

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design 

At the same time, banks are aggressively expanding into consumer credit, while the unbanked majority continues to rely on the informal sector at usurious or punitive rates. 

Fintech e-wallets have gained traction, but they remain mostly transactional platforms. Banks, by contrast, are custodial institutions. Even if convergence is inevitable, bridging the informal credit gap will remain elusive unless rates reflect real distribution and collection risks.

This convergence may democratize leverage—but banks still dominate credit usage, reinforcing a top-heavy system. 

Deepening concentration, paired with price restrictions, resembles a cartel. A BSP-led cartel. 

And the first beneficiaries of this low-rate regime? Large enterprises and monied consumers. 

V. Treasury Market Plumbing: Who Really Benefits? 

And like any cartel, it relies not only on market power but also on control of the pipes—the very plumbing of the financial system, now evident in the Treasury market 

The Bangko Sentral ng Pilipinas has dressed up its latest rate cut as part of a “Goldilocks easing cycle,” but the bond market tells a different story.

Even before the policy shift, the Philippine BVAL Treasury yield curve had been flattening month after month, with long rates falling faster than the front end.  (Figure 2, middle and lower charts) 

That is not a picture of renewed growth but of markets bracing for a slowdown and disinflation. 

The rate cut simply ratified what the curve had preemptively declared: that the economy was softening, and liquidity needed to be recalibrated.

Figure 3

From the Treasury market’s perspective, the real beneficiaries weren’t households or corporates—they were institutional actors navigating a crowded, distorted market. 

Trading volumes at the Philippine Treasury market raced to all-time highs in August, just before and during the cut! (Figure 3, topmost diagram) 

This wasn’t retail exuberance—it was plumbing. 

BSP’s direct and indirect liquidity injections, coupled with foreign inflows chasing carry (data from ADB Online) amid global easing and macro hedges created a bid-heavy environment. The rate cut amplified this dynamic, lubricating government borrowing while sidelining private credit. (Figure 3, middle visual) 

VI. Crowding Out: Corporate Issuers in Retreat 

Meanwhile, the collateral damage is clear: corporate bond issuance has been trending downward, regardless of interest rate levels—both in nominal terms and as a share of local currency debt. (Figure 3, lowest window) 

This is evidence of the crowding-out syndrome, which suggests that BSP easing isn’t reviving private investment—it’s merely accommodating fiscal expansion. 

In the cui bono calculus, the winners of rate cuts are clear: the state, the banks, and foreign macro hedgers. 

The losers? Domestic firms, left behind in a market—where easing no longer means access. 

VII. The Free Lunch Illusion: Debt and Servicing Costs

Figure 4

The deeper reason behind the BSP’s ongoing financial plumbing lies in social democracy’s favorite illusion: the free lunch politics. 

Pandemic-era deficit spending has pushed public debt to historic highs (Php 17.27 trillion in June), and with it, the burden of debt servicing. (Figure 4, topmost chart) 

July’s figures—due next week—may breach Php 17.4 trillion. 

Even with slower amortizations temporarily easing the burden in 2025, interest payments for the first seven months have already set a record.

Rising debt means rising servicing obligations—even at the zero bound. The illusion of cheap debt is just that: an illusion. 

Crowding out isn’t just theoretical. 

It’s visible in the real economy—where MSMEs and half the population (per self-poverty surveys) are squeezed—and in the capital markets, where even the largest firms are feeling the pinch. 

The entropy in financial performance among PSE-listed firms, especially the PSEi 30, underscores that the spillover has reached even the politically privileged class. (see previous discussion—references) 

Monthly returns of the PSEi 30 similarly reflect the waning impact of the BSP’s cumulative easing measures since 2009. (Figure 4, middle image) 

In a world of scarcity, there is no such thing as a permanent free lunch. 

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing 

If the government is the brain of the political economy, banks are its heart. And the pulse is showing increasing signs of palpitations.

The banking system’s books reveal the scale of the plumbing, most visible in the record-high net claims on central government (NCoCG) held by the banking system and Other Financial Corporations (OFCs). 

Bank NCoCG surged 7.5% YoY to an all-time high Php 5.591 trillion in Q2 2025, pushing Held-to-Maturity (HTM) assets up 1.8% YoY to a milestone Php 4.075 trillion. (Figure 4, lowest graph)

Figure 5 

OFCs saw an even sharper jump—14.7% in Q1 to a record Php 2.7 trillion! (Figure 5, topmost diagram) 

According to the BSP, OFCs are composed of non-money market investment funds, other financial intermediaries (excluding insurance corporations and pension funds), financial auxiliaries, captive financial institutions and money lenders, insurance corporations, and pension funds. 

Yet despite these massive reallocations—and even with banks drawing a staggering Php 189 billion from their freed-up reserves (Claims on Other Depository Corporations) after March’s RRR cut—liquidity remains tight. (Also discussed last August, see references) (Figure 5, middle chart) 

Cash reserves continue to decline. Though cash-to-deposit ratios bounced in June from May’s all-time low, the trend remains downward—accelerating even as RRR rates fall to 5%. (Figure 5, lowest image) 

Liquid assets-to-deposit ratios have slumped to levels last seen in May 2020, effectively nullifying the supposed benefits of the BSP’s Php 2.3 trillion pandemic-era injections. 

This strain is now reflected in bank stocks and the financial index—dragging down the PSE and the PSEi 30. 

Goldilocks, eh? 

After the rate cut, the BSP immediately floated the possibility of a third RRR reduction—“probably not that soon.” Highly doubtful. Odds are it lands in Q4 2025 or Q1 2026. 

But even if the BSP dismantles the Reserve Requirement entirely, unless it confronts the root cause—the Keynesian dogma that credit-financed spending is a growth elixir—the downtrend will persist. 

At zero RRR, the central bank will run out of excuses. And the risk of bank runs will amplify.

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

Figure 6 

The toll on banks is already visible—profits are unraveling. From +10.96% in Q1 to -1.96% in Q2.  (Figure 6, upper visual) 

The culprit? 

Losses on financial assets—driven by surging provisions for credit losses, which ballooned 89.7% to Php 43.78 billion in Q2. That’s pandemic-recession territory—December 2020. (Figure 6, lower graph) 

X. Conclusion: Goldilocks Faces the Three Bad Bears 

The cat is out of the bag. 

The “stimulative effect” is a political smokescreen—designed to rescue banks and the elite network tethered to them. It’s also a justification for continued deficit spending and the rising debt service that comes with it. 

But “sweet spots” don’t last. They decay—subject to the law of diminishing returns. 

Paradoxically, under the Goldilocks fairy tale, there were three bears. In our case: three ‘bad’ bears:

• Crowding out and malinvestments
• Surging systemic leverage
• Benchmark-ism to sanitize worsening fundamentals 

Even the Bank for International Settlements has quietly replaced Philippine real estate pricing bellwethers with BSP’s version—one that paints booming prices over record vacancies. 

Nonetheless, the bears are already in the house. The porridge is cold. And the bedtime story is over. What remains is the reckoning—and the question of who’s prepared to face it without the comfort of fairy tales 

All signs point to a late-stage business cycle in motion. 

___

references 

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

Prudent Investor Newsletters, Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility, August 17, 2025 Substack