The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts

 

Besides, stock prices are primarily information... they tell investors where their capital can be most fruitfully employed. The important thing is not that prices be high or low... but that they be honest—Bill Bonner 

In this issue

The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts

I. Monetary Tailwinds and a Fiscal Inflection

II. PSEi 30: Debt as the Primary Growth Driver

III. Record Revenues, Yet Slowing Growth Momentum

IV. Net Income Challenges: Slow Growth and Declining Margins

V. “Cui Bono?” — Who Benefits from GDP Growth? A Symptom of Trickle-Down Economics

VI. Sectoral Performance: Debt, Revenue, and Income Trends

VII Top Movers: Individual Firm Highlights

VIII. Final Notes on Transparency and Accuracy 

The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts 

What the PSEi 30 tells us about the Philippine economy’s fiscal and financial direction in 2024. 

I. Monetary Tailwinds and a Fiscal Inflection 

The Bangko Sentral ng Pilipinas (BSP) initiated the first phase of its easing cycle in the second half of 2024, comprising three policy rate cuts alongside a reduction in the Reserve Requirement Ratio (RRR). 

This coincided with an all-time high in public spending, bolstered by a surge in non-tax revenues. As a result, the Philippine fiscal deficit marginally narrowed to Php 1.506 trillion in 2024—still the fourth largest in history. To fund this gap, public debt rose to a historic high of Php 16.05 trillion. 

Simultaneously, a steep decline in quarterly Consumer Price Index (CPI) readings during Q3 and Q4 pulled average annual inflation down from 6.0% in 2023 to 3.2% in 2024. 

These three macroeconomic developments—monetary easing, record government expenditure, and easing inflation—served as key underpinnings of GDP growth. Despite noticeable slowdowns in Q3 (5.2%) and Q4 (5.3%), relatively stronger performances in Q1 (5.9%) and Q2 (6.5%) lifted full-year GDP growth to 5.7%, edging up from 5.5% in 2023.

Against this backdrop, how did the elite composite members of the PSEi 30 perform in 2024?

This article examines their financial performance, focusing on debt, revenue, net income, and sectoral contributions, while highlighting the broader implications for the Philippine economy. 

Nota Bene:

PSEi 30 data include redundancies due to the inclusion of assets and liabilities of subsidiaries and their parent holding firms.

Chart Labels:

B 1A Recent Data: Consists of current members and includes possible data revisions from the past year.

1B Data: Reflects comparisons between previous years, consisting of members during the existing period and unaudited publications for the period.

II. PSEi 30: Debt as the Primary Growth Driver

Figure 1 

In 2024, non-financial debt surged by 8.44% to a record Php 5.767 trillion, marking the third largest annual increase since 2018. (Figure 1, topmost pane) 

This Php 449 billion net addition occurred despite elevated borrowing costs, with 10-year BVAL rates remaining high. (Figure 1, middle graph) 

Relative to the broader financial system, non-financial debt accounted for 16.92% of total financial resources (bank and financial assets), slightly above the 16.87% share in 2023. (Figure 1, lowest image) 

On top of this, the top three PSEi 30 banks reported a staggering 49.99% increase in bills payable—from Php 483.58 billion in 2023 to Php 725.30 billion in 2024. Notably, this figure excludes bond issuances. 

III. Record Revenues, Yet Slowing Growth Momentum

Figure 2

The PSEi 30 collectively posted record revenues of Php 7.22 trillion, representing a 7.91% increase or Php 529.07 billion in absolute terms. This slightly surpassed the 7.8% growth or Php 478 billion gain in 2023. (Figure 2, upper chart) 

However, in historical context, the 2024 increase ranked as the third smallest since 2018—reflecting the easing of price pressures as the CPI cooled. 

Systemic leverage—defined here as the sum of public debt and universal/commercial bank loans (excluding fixed-income instruments and FDIs)—rose by 11.1% in 2024, reaching an all-time high of Php 29.96 trillion. (Figure 2, lower chart) 

This expansion in credit, alongside continued deficit spending, substantially supported aggregate demand, thereby contributing to the PSEi 30’s revenue gains. 

Figure 3 

However, viewed from another lens, the slowing contribution of money supply relative to GDP—a key indicator of real economy liquidity—has increasingly revealed slack in both PSEi 30 performance and broader GDP growth. (Figure 3, upper image) 

The 2020 spike in this metric underscored the BSP’s historic role in backstopping the banking system during the pandemic. 

Yet it also marked a turning point in the financialization of the Philippine economy—an underlying force behind demand-side inflation and a structural driver of imbalances between financial sector gains and real-sector productivity. 

Importantly, the deceleration in revenue growth mirrored the nominal GDP trends of 2023 and 2024, highlighting the interconnectedness of corporate performance and macroeconomic trends. (Figure 3, lower visual) 

IV. Net Income Challenges: Slow Growth and Declining Margins

Figure 4

Net income across PSEi 30 firms grew at a sluggish 6.8% to a record Php 971 billion. While this represents a nominal gain of Php 80.31 billion, both the growth rate and the absolute increase were the smallest since 2021. (Figure 4, topmost image) 

Despite widespread corporate participation in government projects, historic public spending growth of 11.04% outpaced net income growth, underscoring the accumulating inefficiencies in the effectiveness of 'trickle-down' policies. (Figure 4, middle graph) 

The PSEi 30 maintained a steady net income margin of 13.44%, slightly lower than last year's 13.45% but still exceeding the 5-year average of 12.15% (2019–2024). (Figure 4, lowest chart) 

Critically, the debt-to-net income ratio revealed that Php 0.46 in debt was needed to generate every Php 1 in profit. 

More alarmingly, on a net basis, Php 7.3 in new debt was required for every Php 1 increase in profit—a record high. 

The takeaway: Deepening debt dependency to drive profits is not only artificial but also subject to diminishing returns. 

V. “Cui Bono?” — Who Benefits from GDP Growth? A Symptom of Trickle-Down Economics

Figure 5

Revenue as a share of GDP edged up to 27.3% in 2024 from 27.22% in 2023—marking the third-highest level since 2019. (Figure 5 upper window) 

The PSEi 30 accounted for more than a quarter of nominal GDP, excluding additional contributions from other publicly listed firms under elite conglomerate umbrellas. 

This substantial contribution highlights a hallmark of the government and BSP’s “trickle-down” economic development model, characterized by increased business operations through direct state spending, which disproportionately benefits politically connected corporate giants. 

Importantly, the BSP’s easy-money regime functions as an implicit subsidy, enabling elite firms to acquire cheaper credit as a protective moat against competition. 

The result: a centralization of economic gains among the elite, while MSMEs and average Filipinos—Pedro and Maria—bear the costs. 

In essence, the model privatizes profits while socializing costs, exacerbating economic inequality. 

VI. Sectoral Performance: Debt, Revenue, and Income Trends 

In 2024, sectoral performance varied significantly: (Figure 5, lower table) 

Debt: The industrial sector posted the largest percentage increase in debt at 17.33% year-on-year (YoY), but holding firms dominated in peso terms, accounting for a 67.85% share of total debt. 

Revenues: Despite rising vacancies, the property sector recorded the highest percentage revenue gain at 16.6% YoY. However, holding firms led in absolute peso increases and percentage share, contributing 45.9% of total revenue growth. 

Net Income: The services and property sectors outperformed with net income growth of 20.6% and 17.6%, respectively. Banks, however, led in peso growth and accounted for 45.6% of the net income increase. 

Cash Holdings: Non-financial firms’ cash holdings contracted by 1.91%, driven by a 14.6% and 3.35% decline in reserves in the industrial and service sectors, respectively. 

In contrast, PSEi 30 banks saw their cash holdings rise by 14.6%, despite the BSP reporting otherwise. This discrepancy raises questions over possible dual standards in bank reporting. 

VII Top Movers: Individual Firm Highlights

Figure/Table 6 

Debt: San Miguel Corporation (SMC) led all firms with a Php 155 billion increase in debt, bringing its total to a historic Php 1.560 TRILLION—comprising 35% of all non-financial PSEi 30 debt. Ayala Corporation and its energy subsidiary ACEN followed with Php 76.9 billion and Php 54 billion increases, respectively.

Revenues: San Miguel, BPI, and BDO were the top contributors in terms of revenue increases. Conversely, DMC and its subsidiary Semirara reported revenue contractions. 

Net Income: ICT, BPI, and BDO led net income growth in absolute terms, while SMC and SCC posted the largest declines. 

Cash Holdings: The largest cash increases came from SMC and ICT, while Aboitiz Equity Ventures and LTG Group reported the steepest reductions. 

VIII. Final Notes on Transparency and Accuracy 

The credibility of this analysis rests on disclosures from the Philippine Stock Exchange and related official sources. However, questions persist regarding the possible underreporting of debt and the inflation of both top-line and bottom-line figures by certain firms. 

Moreover, when authorities overlook or fail to act on instances of misreporting—especially by large, elite-aligned corporations—this raises serious governance concerns. Such inaction fosters moral hazard and risks entrenching a culture of non-transparency within the corporate sector. 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

 At the outset, the masses misinterpreted it as nothing more than a scandalous rise in prices. Only later, under the name of inflation, the process was correctly comprehended as the downfall of money—Konrad Heiden in 1944

In this issue

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth

V. Examining the Discrepancies in Employment Data and Consumer Demand

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing

VIII. Surging Consumer NPLs as Driver of Falling Inflation

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility 

The recent decline in the Philippine CPI, which fell to 3.3% in August, is a symptom of strained consumers. Overleveraging has led to an acceleration in consumer loan NPLs in Q2. 

GMANews, September 5, 2024: The Philippines’ inflation rate eased in August, after an acceleration seen in the prior month, due to slower increases in food and transportation cost during the period, the Philippines Statistics Authority (PSA) reported on Thursday. At a press conference, National Statistician and PSA chief Claire Dennis Mapa said that inflation —which measures the rate of increase in the prices of goods and services— decelerated to 3.3% last month, slower than the 4.4% rate in July. This brought the year-to-date inflation print in the first eight months of 2024 to 3.6%, a slowdown from the 5.3% rate in the same period last year and still within the government’s ceiling of 2% to 4%. 

Quotes from previous posts… 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024)

__ 

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.  

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble. (Prudent Investor, September 2024) 

Let us examine the data in relation to other relevant metrics.

First, the August Consumer Price Index (CPI) fundamentally confirmed the signals provided by the Philippine yield curve regarding the resumption of its downtrend. We will explore this in more detail later.

Figure 1

Second, a slowing CPI does not imply that prices are falling, as some officials have suggested. Rather, it indicates a deceleration in the rate of price increases for the average goods and services in the government’s CPI basket. That is to say, authorities continue to use the inflation channel as an indirect means of taxation. Even from the standpoint of the CPI, the Philippine peso has lost over 99% of its purchasing power since 1957. (Figure 1, topmost chart)

Third, the headline CPI has become increasingly volatile, as evidenced by its significant fluctuations: it surged from 3.7% in June to 4.4% in July, then decreased to 3.3% in August. The rate of change in the Month-on-Month (MoM) data illustrates this volatility. (Figure 1, middle image) 

Notably, with the largest weighting in the CPI basket, food is usually the culprit for this volatility. 

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality 

Fourth, the upside spike in housing, water, gas, and other utilities inflated the headline CPI. Rent and utilities were the only categories that experienced an increase in August on a month-on-month (MoM) basis. (Figure 1, lowest graph) 

Without the impact of rent and utilities, the headline CPI would have been drastically lower. This category has a significant weighting in the CPI basket, with a 21.4% share.

Figure 2

Fifth, the decline in the rate of price increases, as indicated by the headline CPI of 3.3% in August, had minimal impact on the bottom 30% of households, who experienced a CPI of 4.7% (down from 5.8% in July). However, the disparity between these categories remains at 2018 levels. (Figure 2, topmost diagram) 

Even with its flawed measurement, the government’s CPI highlights the broadening inequality. 

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans 

Sixth, the volatility of the headline CPI hasn’t been corroborated by the non-food, non-energy Core CPI, which continues to decline. 

Although the gap between the headline CPI and the Core CPI has narrowed, it remains substantial due to the relatively faster decline in the Core CPI. (Figure 2, middle graph) 

Seventh, the law of supply and demand dictates that if the supply of goods or services exceeds demand, prices will fall. Conversely, if demand outstrips supply, prices will rise. 

In the current context, the weakening of the Core CPI is a symptom of the sustained erosion of domestic demand. 

This is exemplified by the consistently diminishing rate of price increases in retail components such as furnishing household equipment and maintenance, clothing and footwear, and personal care and miscellaneous goods. (Figure 2, lowest chart)

Figure 3

Eighth, the growth of total universal-commercial bank loans remains on a remarkable streak, posting a 10.4% growth rate last July—its third consecutive month of 10% growth. (Figure 3, topmost window) 

Moreover, universal commercial bank household credit grew at an even faster pace of 24.3%, marking its twenty-third consecutive month of over 20% growth! (Figure 3, middle diagram) 

Given this explosive growth in consumer and overall bank credit, which should have theoretically stimulated demand, why hasn’t it boosted the CPI?

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth 

Ninth, what has happened to the "Marcos-nomics stimulus" and the ramping up of Q2 record debt-financed public spending? Why have these measures not bolstered demand and the CPI? (Figure 3, lowest chart)

Figure 4

Tenth, the supply side has hardly been a factor in the CPI slowdown.

The slackening of imports, which were down 7.5% (in USD million) in June, was not an anomaly but a trend since peaking in August 2022.  (Figure 4, topmost pane) 

Domestic manufacturing has also not shown excessive growth. Manufacturing posted a 4.7% value growth and 5.25% volume growth last July, marking the third highest monthly growth since August 2023 (a year ago). (Figure 4, lower left chart) 

The headline S&P Global Philippines Manufacturing PMI reported an unchanged index of 51.2 in August, unchanged from July. (Figure 4, lower right chart) 

The PMI index has been consolidating with a downside bias, as demonstrated by the "rounding top." 

If the supply side had managed to grow at a minor to moderate rate in recent months, then demand represents the weak link behind the sliding CPI rate.  

The lack of significant supply-side expansion suggests that the primary driver of the CPI slowdown is the erosion of domestic demand. 

V. Examining the Discrepancies in Employment Data and Consumer Demand 

Why so?

The employment data is unlikely to provide a satisfactory explanation. 

Aside from the questionable nature of the statistics, the government attributed the swelling of July's employment rate to fresh graduates entering the workforce.

 

GMANews, September 6: The number of unemployed Filipinos increased in July as millions of young individuals, who graduated from college or senior high school and entered the labor force, did not land jobs during the period, the Philippines Statistics Authority (PSA) reported on Friday.

The decrease in the labor force participation rate from 66% in June to 63.5% in July likely underestimated the true number of unemployed individuals.

Figure 5

It's worth noting that a "rounding top" appears to be a persistent trend in the labor participation rate. (Figure 5, topmost diagram)

If this pattern continues, then for whatever reasons, it's likely that the labor force will shrink, which would negatively impact the employment population.

While most sectors reported decreases in employment (MoM) last July, the government (public administration and defense), finance, and IT sectors reported significant gains. The increase in government jobs is not surprising, given that they are one of the largest employers, particularly with the record high public spending in Q2. (Figure 5, middle image)

In any case, despite the second-highest employment rate in June, the rise in unemployment in July suggests that the substantial growth in bank credit has not been sufficient to create enough investments to absorb new graduates. 

The irony is that even if this data were close to accurate, the high employment rate demand story has been incongruous or inconsistent with the slowing consumer, the record high consumer bank credit levels, and the CPI. 

Another paradox is that the volatility in the labor data may be influenced by social mobility. In reality, the Philippine labor market has been beset by the byzantine nature of onerous labor regulations. 

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks 

Beyond that, the slope of the Philippine Treasury markets provides insights into economic conditions, inflation, and potential risks. 

Not only has it accurately predicted CPI dynamics, but it has also indicated the likelihood of increased economy-related risks. 

Consider this: Why has the CPI been on a temporary downtrend despite record levels of Universal Commercial bank consumer lending? This observation applies even to production loans, but our focus here is on consumer loans. 

The banking system’s total consumer loans, including real estate loans, surged to an all-time high of PHP 2.81 trillion in Q2 2024. This represents a record 21.75% of total bank lending, meaning that one-fifth of all Universal Commercial bank lending has been directed towards consumers.  (Figure 5, lowest graph) 

Four-fifths of these, which also demonstrates a declining share, represent lending to the supply side sector, primarily benefiting the elites.

Figure 6

This data represents evidence that Philippine banks have undergone a seismic transformation: a preference for consumers over producers. 

From a sectoral perspective, banks have also shifted their lending preferences toward high-risk, short-term lending—specifically credit cards and salary loans. 

Since 2017, the percentage share of credit cards relative to the total has surged to a milestone high, while the share of salary loans has also increased since 2021. Notably, the rapid growth of these segments has come at the expense of real estate and motor vehicle loans. (Figure 6, topmost image) 

Strikingly, the share of consumer real estate loans peaked at 45% in Q4 2021 and then nose-dived to 37% by Q2 2024. 

In a nutshell, banks have "backed up their trucks" to rapidly leverage Philippine consumers. 

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing 

The all-time high in consumer lending did not emerge in a vacuum. 

Primarily, consumers have turned to credit cards and salary loans to compensate for the loss of purchasing power due to inflation. 

Secondly, this trend has deepened consumers' reliance on credit cards and salary loans. 

Thirdly, the extended leveraging of consumers' balance sheets necessitates further credit to refinance or roll over existing debt. Some individuals use multiple credit cards, while others may tap into salary loans or borrow from the supply side for the refinancing of existing debt. 

It is important to note that the consumer credit data reveals an escalation in concentration risks. 

The surge in consumer lending indicates that only a small segment of the population has access to formal credit systems. 

The BSP’s Q2 2023 Financial Inclusion data reveals that consumer credit, including credit cards, salary loans, and other forms of bank credit, is limited to a minority segment of the Philippine population. (Figure 6, middle table)

Not only in finances, this group—primarily from the high-income sector—has been capturing a significant portion of the nation’s resources funded by credit. They are the primary beneficiaries of the BSP’s inflation policies. 

However, they also represent the most fragile source of a potential crisis. 

Conversely, the low level of participation in formal banking does not equate to a low level of leverage for the unbanked population. Instead, this larger segment relies on informal sources for credit. 

However, they also represent the most fragile source of a potential crisis.

Lastly, having reached their borrowing limits, some consumers have begun to default. 

VIII. Surging Consumer NPLs as Driver of Falling Inflation

Have the media or mainstream experts addressed this issue? 

Not when financial services are being marketed or deposits solicited; discussing conflicts of interest remains a taboo.

Despite subsidies and relief measures, the Non-Performing Loans (NPL) in consumer lending have been rising, driven primarily by credit cards and salary loans. (Figure 6, lowest chart)

Figure 7

Again, the all-time high in credit card and salary loans has led to a surge in NPLs. According to the BSP’s various measures, the NPLs for credit cards and salary loans relative to total NPLs in the Total Loan Portfolio (TLP) have been intensifying since 2021 (for salary loans) and 2023 (for credit card loans). (Figure 7, topmost, second to the highest and lowest-left and right graphs)

Despite the massive BSP support, the fastest-growing segments for banks are also the primary sources of their weaknesses. 

Published banking and financial data may be understated due to these relief measures and other factors. 

Why are banks significantly borrowing (focusing on short-term loans), competing with San Miguel, both listed and unlisted non-financials, financials, and the government? 

So, there you have it. The slowing inflation in the face of rampant credit growth is a symptom of the mounting balance sheet problems faced by consumers. 

Borrowings are not only used for spending but are increasingly being utilized to recycle loans—the Minsky Ponzi syndrome process is in motion. 

Extending balance sheet leveraging has not only weighed on consumer spending but has also caused a rise in credit delinquency. 

It also exposes the façade of a 6.3% Q2 GDP. 

The lesson is: current conditions reveal not only the fragile state of consumers but, more importantly, exposes the vulnerability of Philippine banks. 

The treasury markets have been signaling these concerns. 

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

But it doesn’t end here. 

Do you think the government would allow GDP to sink, which would deprive them of financing for their boondoggles? 

Naturally, no. So, authorities have embarked on a tacit "Marcos-nomics stimulus" to prevent cross-cascading defaults, initially marked by a resurgence of illiquidity. 

With the upcoming elections, public spending has surged, leading to increased monetary growth, as indicated by the most liquid measure, M1 money supply. 

Yes, this exposes the artificiality of a so-called "restrictive" or "tightening" regime.

Needless to say, this process will only foster more economic imbalances, which will manifest through the enlarged “twin deficits.”

Economic maladjustments will become evident in the growing mismatch between demand and supply, as well as between savings and investment (record savings-investment gap), leading to increased fragility in the banking system’s balance sheet. 

This, in turn, will prompt more easing policies from the BSP and accelerated interventions and liquidity injections from the tandem of financial institutions (led by banks) and the BSP. 

We should expect the BSP to expand and extend its relief measures to the banking system in an effort to buy time.

Or, the BSP’s strategy to address an escalating debt problem is to facilitate accelerated debt absorption. Amazing! 

As such, we should expect a third wave of inflation, in the fullness of time, which will exacerbate the leveraging of the economic system and worsen the current predicament. 

The political path dependency is driven primarily by perceived "free lunches" (or throwing money into the system). 

The promised bull market will not be in Philippine assets but in debt, leveraging, and its attendant risks. 

So, despite the Philippine peso floating along with its regional peers, benefiting from the perceived "Powell Pivot," the USD/PHP exchange rate should eventually reflect the developing economic and financial strains. 

Until a critical disorder surfaces, a reversal in this political direction is unlikely.

Eventually, the treasury curve will indicate when this reversal might occur. 

The point is that even when distorted by interventions, markets are reliable indicators of future events. 

___

References 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

Prudent Investor, 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

 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Doom-loops don't occur in isolation: they interact with each other, reinforcing each other. Attempts to suppress one doom-loop by papering over the unwelcome reality accelerate other doom-loops—Charles Hugh Smith 

In this short issue 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

I. July’s CPI Momentum Accelerates

II. July Headline and Core CPI’s Diametric Paths 

III. Philippine Treasury Market Defied the July CPI Data

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Not only inflation, but stagflation remains a principal risk to the Philippine political, financial, and economic landscape

Inquirer.net, August 6, 2024: Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported on Tuesday. Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year…Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.  

Some observations from the July CPI Data:  

I. July’s CPI Momentum Accelerates

Figure 1

First, a greater than 0.5%—but less than 1%—spike in the Month-on-Month (MoM) growth rates has typically been a harbinger of a sustained uptick in the Headline CPI Year-over-Year (YoY). July’s MoM rate jumped by 0.72%. (Figure 1 upper image) 

Does this imply a higher CPI in August and the strengthening of the third wave of this first CPI cycle?

II. July Headline and Core CPI’s Diametric Paths 

Second, while the Philippine headline CPI surged from 3.7% in June to 4.4% in July, core CPI dropped from 3.1% to 2.9%. The gap between the headline and core reached its widest level since 2022. (Figure 1, lower graph) 

In the past, this chasm was a result of the headline rising faster than the core or vice versa. Or, while both were headed in the same direction, the divergent pace or speed resulted in the disparity. The recent gap signified a product of path divergence. 

Energy was the primary source of July’s "inflation." According to the BSP, although food inflation also accelerated due to faster price increases of meat and fruits, "the uptick in July inflation was traced mainly to non-food inflation, particularly higher electricity rates and upward adjustments in domestic prices of petroleum products."

Figure 2

Interestingly, the transport CPI spiked from 3.1% to 3.6% despite the moderation in global oil prices as measured by the US WTI. (Figure 2, upper window)

According to the BSP’s inflation basket, food, transport, electricity, and gas constitute 53.5% of the CPI basket. 

However, the antipodal directions indicate generally weak demand for non-food and transportation items. 

Could this signify an escalation of stagflation? 

Moreover, the weakening MoM change in the core CPI has barely supported the rise in general prices in the economy. (Figure 2, lower diagram) 

III. Philippine Treasury Market Defied the July CPI Data

Figure 3 

Next, despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Figure 3, upper chart) 

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation 

Needless to say, the escalating tensions between the deflationary and inflationary forces in the economy should lead to more volatility, and this directional impasse will likely be resolved by (path-dependent) government policies. 

Or, while we are not fans of government statistics, should the government maintain the pace or speed of the latent "Marcos-nomics stimulus," forces of inflation are likely to prevail in this phase of the CPI cycle. 

Marcos-nomics, as Q2 GDP has validated, will continue to anchor on boosting GDP (infrastructure and welfare), funding pre-election, and defense spending. 

That is to say, such stimulus would increase demand by intensifying systemic leverage. 

Figure 4 

The combination of record Universal Commercial Bank lending levels—or rebounding growth rate—and the upsurge in the government’s deficit spending has prompted the most liquid of the money supply measures (M1) to accelerate upward. (Figure 3, lower chart, Figure 4, top and bottom graphs) 

If sustained, this should send the CPI higher over time. 

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

Lastly, using official data, the CPI reveals shades of broadening inequality.

The Bottom 30% (B30) income households buy at the same prices as others.

Figure 5

In July, the headline CPI rose faster than the B30, which pulled their spread marginally lower after reaching 2018 highs last June. (Figure 5, topmost graph) 

However, the spread in the Food CPI between the headline and the B30 remains wide and at 2022 levels. (Figure 5, middle image) 

The widening gap in the PSA’s B30-headline inflation data partially confirms a private sector poll’s finding that hunger rates have been rising—not limited to the B30 class, but also on self-poverty ratings. (Figure 5, lowest chart) 

Stagflation is already present among the average citizens. 

Until the government and the BSP discipline themselves from their free-money "trickle-down" policies, stagflation will remain a primary political-economic-financial risk.

  

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

 

The current political status quo, however, is built around protecting investors—rather than the taxpayers who ultimately pay all the bills—from risk. This method of turning debt into inflation is attractive to governments and their Wall Street enablers because it shifts the burden of runaway spending to ordinary savers and consumers who pay the real price of de facto inflationary default through price inflation, unaffordable homes, stagflation, and falling real wages—Ryan McMaken 

In this issue

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

I. Global Central Banks Predominantly on an Easing Trajectory

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

The decline in June CPI was broad-based and signifies primarily a demand-side factor. And with global central banks on an easing spree, will this and deficit spending anchor the "Marcos-nomics stimulus"?

I. Global Central Banks Predominantly on an Easing Trajectory

Figure 1

Easy money policies have made a dramatic comeback, and charts reveal that global central banks have been reinforcing the market's propensity for leveraged speculative activities.

For the first time since October 2020, the Bank of America (BofA) reports that there were zero rate hikes from central banks last June. (Figure 1, topmost and middle charts)

Ironically, even as inflation has yet to be fully contained or subdued, this aggregate easing trajectory reinforces the path dependency of authorities, primarily in support of the swelling of government control of the economy channeled through the rapid expansion in deficit spending (partly via the war economy), boosting asset prices which serve as collateral, and the backstopping of systemic leveraging (debt expansion).  

In the same vein, the uptrend in US government deficit spending should serve as a template for the world. (Figure 1, lowest image) 

In the Asian region, governments like Thailand (USD 13.5 billion for household debt relief), South Korea (USD 18 billion for Micro Businesses), and Indonesia (USD 28 billion-Free Meal for schools) have been rolling out various forms of politically targeted subsidies in "support of the economy." 

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias 

The Philippine June CPI data illustrates such conditions from the lens of the Philippine political economy. 

Business Times/ Reuters July 5, 2024: PHILIPPINE annual inflation was at 3.7 per cent in June, easing from the previous month on a slower increase in utility costs, the statistics agency said on Friday. The rate, which was below the 3.9 per cent forecast in a Reuters poll, brought the average reading in the six months to June to 3.5 per cent, within the central bank’s 2 to 4 per cent target range. The Philippine central bank said inflation was expected to have settled between the 3.4 to 4.2 per cent range in June. 

This outlook represents an update of our June 10th post, predicting the temporary peak of the recent bounce in inflation.

Firstly, the Bangko Sentral ng Pilipinas (BSP) exercises significant control over the inflation narrative.

Before releasing the Consumer Price Index (CPI) data, the BSP projects a path that serves as the basis for consensus estimates, representing the survey's "normal distribution."

While media outlets focus on the BSP's annual targets when reporting CPI numbers, the public often overlooks the deviation of the consensus median estimate from the actual outcome. It also discounts their flawed predictive track record.

The selective attention from the "pin the tail on the donkey" approach perpetuates "confirmation bias," reinforcing the public's preconceived notion that authorities have complete control over the economy.

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

Next, authorities bask in the glow of reported slowdown in inflation, they quickly claim credit or take a victory lap.

Inquirer.net, July 5, 2024: The lower inflation rate registered in June — at 3.7 percent — is proof that the administration’s economic policies have been effective, House of Representatives Speaker Ferdinand Martin Romualdez said on Friday.

However, few notice that data from the Philippine Statistics Authority (PSA) reveals a different story—this includes officials. 

In fact, it shows that inflation has had an adverse impact on households at the bottom 30%, leading to a widening inequality gap.

Figure 2 

The gap between the national CPI and the CPI of households in the bottom 30% has surged to its highest level since the post-Asian crisis in 2002! (Figure 2, topmost graph) 

While the bottom 30% buys goods at the same prices from the same stores as everyone else, their higher inflation rate highlights the disproportionate loss of purchasing power against goods and services.

The slowdown in the statistical inflation rate has barely alleviated conditions, affecting not only the lowest-income households but also average households, while elites benefit from direct access to the formal banking system and capital markets to safeguard their assets.

Evidence?

Including government external borrowings, FX deposits in Philippine banks have soared to Php 3.324 trillion in May 2024, marking the third-highest level recorded, in tandem with the surging US dollar-Philippine peso pair. (Figure 2, top and middle windows) 

Given the low penetration levels of formal finance and financial literacy, this surge in FX deposits could be interpreted as FX "speculation" by elites and upper echelons of households within the BSP’s jurisdiction. 

Amazing, right?

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

Authorities may view the slowing inflation rate as an accomplishment, but the easing of the CPI is likely to slow further for several politically unpalatable reasons:

Figure 3

One. The PSA's CPI month-on-month rate continues to decline, in contrast to its strengthening which had backed the previous uptrend in the CPI. (Figure 3, upper chart) 

Two. Outside of food CPI, there has been a sustained moderation of the Core (non-food and non-energy inflation) which posted a steady 3.1% in June. Importantly, prices have been falling across the board. Paradoxically, food inflation has been moderating globally. (Figure 3, lower diagram)

Figure 4 

Three. Philippine treasury traders have bet against inflation. T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts. (Figure 4, top and bottom charts)

Four. While the slowing inflation rate has been perennially sold to the public as a supply-side phenomenon, the real story is that this represents a demand-side downturn. 

For instance, in June, we pointed out the surge in consumer credit card and salary loan non-performing loans (NPLs) in Q1 2024. These NPLs have now surfaced to the "core" from the "fringes." 

Businessworld, July 5, 2024: THE BANKING INDUSTRY’S nonperforming loan (NPL) ratio soared to a near two-year high in May, data from the Bangko Sentral ng Pilipinas (BSP) showed. The Philippine banking industry’s gross NPL ratio rose to 3.57% in May from 3.45% in April and 3.46% a year ago. This matched the 3.57% ratio in July 2022. It was also the highest in 23 months or since 3.6% in June 2022.

The BSP data on the banking system’s selected performance indicators confirm our view that the accelerating accounts of consumer borrowings (and businesses) have been used to roll over or refinance existing record debt rather than for consumption.

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. (Prudent Investor, 2024)

Figure 5

Aside from the historic high of held-to-maturity (HTM) assets, rising non-performing loans (NPLs) could exacerbate liquidity tightening in the banking system and exert pressure on banks' accounting profits. (Figure 5, topmost chart)

Loan growth in the banking system has declined in similar fashion to 2018-19, with NPLs on the rise following rate hikes from the increase in the CPI.  (Figure 5, middle and lowest graphs)

Rising NPLs would not only slow loan growth but also negatively impact banks' investment portfolios, increase credit risks, and deteriorate asset quality, ultimately affecting capital conditions. 

While the BSP has employed various regulatory and liquidity measures to disguise the decaying conditions in the banking system, eventually, the chickens come home to roost or these measures will eventually prove ineffective.

Figure 6

Haven’t you noticed? Banks have been increasing their borrowings from the public. While they market these as 'green' or 'sustainable' bonds to piggyback on politically favored themes, they are essentially debt. 

At Php 1.398 trillion, the banking system's outstanding bills and bonds have nearly reached Php 1.44 trillion—levels similar to those seen in 2019 (pre-pandemic). (Figure 6, upper diagram) 

Of course, everyone calls this "sound banking"…until it isn’t. 

The government will release labor data tomorrow, on July 8th. 

Other economic sensitive data, such as external trade and manufacturing, have yet to be released. 

Nonetheless, the S&P Global PMI reported a softening of the manufacturing conditions last June. (bold added) 

The first half of 2024 ended with a further improvement in operating conditions across the Filipino manufacturing sector, as per the latest PMI® data by S&P Global. Output and purchasing activity rose at accelerated rates. However, June marked a notable slowdown in new orders growth. Moreover, manufacturing companies in the Philippines continued to reduce their backlogs, and further trimmed back their staffing levels. Turning to prices, despite a fresh rise in cost burdens, the rate of input price inflation remained weaker than that seen historically. Meanwhile, charges were raised at a softer pace in June. The headline S&P Global Philippines Manufacturing PMI – a composite single-figure indicator of manufacturing performance – fell to a three-month low of 51.3 in June, from 51.9 in May. (S&P Global, July 2024) 

The Philippine PMI seems to have been plagued by a "rounding top." (Figure 6, lower image) 

A slowdown in credit usage by businesses and households will likely exert downward pressure on inflation and GDP.  

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

On the other hand, inflation could find a floor from the ramping up of deficit spending. 

May's expenditure was historic as it almost reached the three-year streak of record-breaking December levels. 

For instance, the Philippine government proposes to import costly fighter jets, which, if pursued, would swell trade deficits and increase the need for external borrowings, potentially further weakening the Philippine peso. Instead of pursuing this path, it might be more effective to focus on resolving territorial disputes via negotiations. 

It's as if these jets would make a significant difference in deterrence and actual combat. 

Figure 7

Nevertheless, helped by May's expenditure-driven budget deficit, May’s public debt soared by 8.9% YoY and 2.2% MoM to a record Php 15.35 trillion in May.

The all-time high in public debt was primarily fueled by a surge in foreign debt (up 8.8% YoY and 4.2% MoM) that spiked its share of the total from 31.4% to 32%. (Figure 7, topmost graph) 

It is no surprise that public debt dynamics are correlated with the USD/Philippine peso exchange rate, as well as with the CPI. (Figure 7, middle image) 

Alongside the transformation of the banking system's business model towards consumer spending, the trickle-down "spending one’s way to prosperity" economic development paradigm focuses on centralizing the economy via the credit-financed record savings-investment gap, channeled through the "twin deficits." This translates to an increasing reliance on foreign savings. 

Subsequently, the deepening reliance on credit increases the incentives for the BSP to ease its monetary policies. 

This also implies that the USDPHP rate is driven nearly entirely by the policy path, as confirmed by data, rather than monetary policy differences between the Fed and BSP. 

With global central banks easing, the BSP can justify its shift to an accommodative stance. 

And as noted earlier, the BSP easing and increased public spending in support of GDP growth could signify the "Marcos-nomics stimulus." 

In light of this, the Philippines would most likely join the ranks of its neighbors in throwing down the gauntlet of stimulus. 

It wasn't until a single 100-basis-point rate cut that the CPI began to rise, accelerate, and sow the seeds of the present 9-year CPI trend. (Figure 7, lowest chart) 

Are we witnessing a repetition of the inflation cycle? 

___

References 

Ryan McMaken, Three Lies They’re Telling You about the Debt Ceiling May 23, 2023, Mises.org 

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

S&P Global, Production growth sustained, although underlying demand trends soften S&P Global Philippines Manufacturing PMI July 01, 2024 PMI.SPGLOBAL.com