The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

 

When you net out all the assets and liabilities in the economy, the only thing that remains is our stock of productive investments, inventions, education, organizational structures, and unconsumed natural resources. Those are the basis of our national wealth—Dr. John P. Hussman 

In this issue 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

I. Reform as Spectacle: Bastiat’s Warning and the Mask of Inclusion

II. What is Seen: Promises of Efficiency and Modernization

III. The Unseen: How CMEPA Undermines the Socio-Political Economy

Theme 1: Taxing Savings, Undermining Capital Formation

Theme 2: Systemic Financial Risks and Policy Incoherence

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy

Theme 4: Institutional and Socio-Political Deterioration

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

A wolf in sheep’s clothing: A policy not only distorting capital markets but reprogramming society toward short-termism, volatility, and fragility. 

I. Reform as Spectacle: From Rhetoric to Repercussion—CMEPA Through Bastiat’s Eyes 

All legislation arrives adorned in rhetoric—its presentation aimed to evoke public trust and collective good. Much like Potemkin villages, reforms such as CMEPA appear to serve Jeremy Bentham’s ‘greater good,’ yet beneath the façade lies the concealed agenda of entrenched interests. 

Echoing Frédéric Bastiat’s indispensable insight, we must learn to discern between what is seen and what is unseen. 

"The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee. 

However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately" (Bastiat, 1850) [bold added] 

With this lens, we examine the Capital Markets Efficiency Promotion Act (CMEPA)—Republic Act No. 12214, enacted on May 29, 2025, effective July 1. 

II. What is Seen: Promises of Efficiency and Modernization 

CMEPA has been billed as a modernization effort to deepen financial markets and enhance participation. Its measures include:

• A flat 20% tax on passive income, including interest from long-term deposits and peso bonds
• Reduced stock transaction tax (STT) to 0.1%
• Expanded definition of “securities” to widen taxable instruments
• Removal of exemptions for GOCCs and long-term depositors, while retaining perks for FCDUs and lottery bettors 

Portrayed as a reform designed to streamline taxation and deepen the capital markets, CMEPA hides a more troubling reality beneath its glitter. It reveals a policy that taxes the foundations of financial stability and long-term capital formation. While it reduces transaction taxes and simplifies some rates, its deeper impact is a radical shift in how the Philippine state attempts to influence public mindset and choices—how it allocates risk, treats saving, and commandeers private resources. 

III. The Unseen: How CMEPA Undermines the Socio-Political Economy 

This critique identifies several thematic consequences: 

Theme 1: Taxing Savings, Undermining Capital Formation

Figure/Table 1

1 Flattening Tax Across All Maturities 

The new 20% final withholding tax (FWT) rate now applies across all maturities, including long-term deposits and investment instruments previously exempted. (Figure/Table 1) 

Retail savers and retirees, dependent on deposit-based income, now face disincentives for capital preservation. Long-term financial instruments lose their privileged status, undermining capital formation. 

2 Financial Repression by Design

By taxing time deposits, foreign currency deposits, and peso-denominated long-term instruments, CMEPA imposes a de facto penalty on saving. Rather than encouraging financial inclusion or stability, it aligns with financial repression tactics: using policy tools to channel private savings toward public financing. 

Moreover, savings and capital are diverted from productive sectors to fund fiscal deficits, choking investment and inviting misallocation. 

3 Regressive Impact on Small Savers 

The uniform tax rate applies regardless of investor profile. Small savers and retirees lose disproportionately. Meanwhile, the wealthy retain flexibility—shifting funds offshore or into tax-exempt alternatives. 

4 Deepening the Savings-Investment Divide 

CMEPA taxes the engine of investment—savings—while encouraging speculative behavior. As domestic savings weaken, investment becomes more reliant on volatile international capital flows and risky leveraging, heightening systemic vulnerability. 

Theme 2: Systemic Financial Risks and Policy Incoherence 

5 Balance Sheet Mismatches 

CMEPA induces short-term liabilities against long-term assets, eroding liquidity buffers. Banks stretch to meet Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) thresholds while chasing yield in speculative sectors—real estate, retail, accommodation, construction. 

FX funding stability worsens as offshore placements rise, increasing currency mismatch risk for entities with dollar-denominated obligations. 

This weakens the stability of the banking system. 

6 Weaker Bank Profitability and Liquidity 

Banks face tighter net interest margins, especially as liabilities are taxed while fixed-yield assets remain unchanged. Asset durations can’t adjust as quickly as funding costs, intensifying balance sheet compression undermining liquidity. 

Combined with BSP’s RRR cuts and other easing, this suggests rising liquidity stress rather than financial deepening.

Figure 2

The weakened deposit base—as revealed by the downtrend in the growth of deposit liabilities—partly explains the doubling of deposit insurance in March, a reactive gesture to rising liquidity risk. Notably, the slowdown appears to have accelerated in 2025. (Figure 2)

Figure 3

But it is not just deposits: the decline in cash and liquid assets—as shown by falling cash-to-deposit and liquid assets-to-deposit ratios—highlights the mounting fragility of bank conditions. (Figure 3)

Figure 4

The law compounds the fragile cash position of Philippine banks, redistributing liquidity into riskier corners of the balance sheet. 

7 Systemic Leverage Risk 

Taxing interest income inflates debt servicing costs, worsening liquidity stress across sectors already burdened with leverage. The gap between savings returns and borrowing costs widens, deepening household and corporate fragility. 

8 Undermining Financial Deepening 

Instead of encouraging broader access to financial instruments, the reform may drive savers toward informal systems, offshore accounts, or speculative assets—increasing volatility and disintermediation. 

9 Incoherence with Monetary Policy 

When interest income is taxed heavily, monetary policy transmission weakens. A rate hike meant to incentivize saving may be neutralized by post-tax returns that remain unattractive. This creates friction between fiscal and monetary authorities. 

10 Disincentivizing Long-Term Domestic Funding 

Removing exemptions from long-duration peso instruments weakens the domestic funding base. The government may respond by issuing shorter-tenor bonds, amplifying rollover risk—particularly amid widening deficits. 

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy 

11 From Market-Based to Tax-Based Government Financing

Figure 5

CMEPA shifts the state's financing strategy from indirect borrowing (via banks' net claims on government) to direct taxation of interest income. This reduces the role of market-based funding and deepens reliance on financial repression. (Figure 5)

Philippine banks have long underwritten the government’s historic deficit spending. But with deposits eroding and liquidity thinning, can CMEPA’s pivot toward direct taxation rebalance this dynamic—or will banks be forced to sustain an inflationary financing regime they may no longer afford?

12 Crowding Out, Capital Misallocation, and Short-Termism

Taxing savings redirects capital from private to public use. Outside of government, the investment community is pushed toward velocity over duration, incentivizing speculative short-term returns rather than productive long-term investments. This leads to boom-bust cycles that consume capital and savings, ultimately lowering the standard of living for the average citizen. 

13 Reform Signals to Mask Fiscal Strain

CMEPA is marketed as efficiency reform, but its primary effect is increased revenue extraction. This is fiscalism masquerading as modernization—a stealth tax hike under the guise of pro-market policy. 

14 Wealth-Effect Ideology and Speculative Diversion 

DOF claims that CMEPA will "diversify income sources," implicitly inviting or encouraging ordinary Filipinos to engage in asset (stock and real estate) speculation. 

The BSP’s inflated real estate index, as discussed last week, aligns perfectly with this narrative. 

Yet if savings have weakened, with what are people supposed to speculate? 

In essence, the law encourages speculative behavior over productive undertakings—gambling on the trickle-down “easy money”-fueled wealth effect to stimulate growth. 

Theme 4: Institutional and Socio-Political Deterioration 

15 Favoring Non-Depository Institutions and Digital Control 

With capital markets shallow, the government’s pivot appears aimed at stock and real estate price inflation to support GDP optics. 

But there might be more to this: could the erosion of savings-based intermediation serve as a stepping-stone—or perhaps a gauntlet—to the advent of a Central Bank Digital Currency (CBDC) regime? 

16 Widening Inequality 

As savings erode and productive investment slows, the burden of taxation and financial volatility falls hardest on low- and middle-income households. Elites with offshore access or alternative vehicles thrive—amplifying the wealth gap. 

17 Capital Consumption and the Attack on Private Property 

CMEPA’s redistributive logic undermines the sanctity of private property. Through financial repression, taxation, and inflation, it transforms capital into consumption, violating the very principles of long-term economic development. 

18 Behavioral Reprogramming Toward Short-Termism 

CMEPA reorients household and institutional incentives by elevating time preferences, nudging actors toward short-term consumption and speculative tendencies. The long-term result encompasses not only economic and financial dimensions, but also social, political, and cultural shifts away from prudence. 

19 Increased State Power and Erosion of Economic and Civil Liberties

The flattening of tax treatment and the reallocation of savings toward the state reassert the growing dominance of the government over economic life. As household and institutional financial autonomy is curtailed, this fiscal centralization represents a creeping erosion of civil liberties. This is not merely fiscal policy—by asserting greater command over private savings and reducing the role of banks and savers in capital allocation, the CMEPA accelerates the centralization of economic control. 

20 Desperation, Not Reform 

Beneath the reformist language lies the scent of desperation. As government spending outpaces revenues and "free lunch" policies proliferate, the state appears increasingly willing to extract resources wherever possible, even at the cost of long-term economic damage. 

CMEPA may be seen less as a policy of modernization and more as a pretext to justify a broader power grab for control over the nation’s remaining financial surpluses. Such fiscal maneuvers reveal a growing reliance on coercive tools to finance political programs and preserve power.

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

CMEPA is not neutral. 

It is policy with intent—velocity over virtue, spectacle over substance. Beneath its reformist gloss lies a deliberate reordering of incentives: a behavioral reprogramming that elevates time preference across households, businesses, banks, and the state itself. 

The ramifications are profound. As savings erode, the economy pivots toward a spend-and-speculate framework, exposing malinvestments and shortening planning horizons. Bank balance sheets tilt toward short-duration, high-risk assets. Businesses recalibrate toward immediacy, while regulatory structures and political priorities—including education—subtly shift to accommodate the new paradigm: favoring current events over historical depth, short-term fixes over long-term resilience. 

As immediacy becomes institutionalized, political incentives may shift as well—gravitating toward authoritarian tendencies, where centralized authority and executive expedience increasingly replace civic pluralism. 

This drift accelerates leverage and volatility. Coupled with BSP’s easy money, fiscal splurging, deepening economic concentration, the entrenching of the “build and they will come” paradigm, benchmark-ism, and the subtle embrace of a war economy—where economic centralization and speculative asset inflation substitute for organic growth—the system veers toward the bust phase of a boom-bust cycle. 

CMEPA, dressed in reformist language, delivers structural inversion through a reordering of incentives—substituting short-term economic activity for long-term capital formation. It penalizes saving, rewards speculation, and manufactures stability to perform confidence. Its impact is philosophical as much as economic: undermining the sanctity of private property and sabotaging the long-term architecture of capital. 

As Ludwig von Mises warned: 

Saving, capital accumulation, is the agency that has transformed step-by-step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving. (Mises, 1956) 

The unseen consequences of policy often outweigh the visible promises, as Bastiat warned us. 

CMEPA’s structural tax changes reprogram public incentives in ways that may appear benign, but will likely unleash instability, fragility, and misallocation—outcomes not immediately visible, but deeply consequential. 

Unless reversed, CMEPA’s legacy will be one of hollowed market and social institutions, increased fragility of public governance, and ultimately, social unraveling—where the erosion of savings and stability gives way to volatility, inequality, and the breakdown of trust in both economic and civic life. 

CMEPA is a wolf in sheep’s clothing. 

____

References: 

Frédéric Bastiat What is Seen and What is Not Seen, or Political Economy in One Lesson [July 1850], https://oll.libertyfund.org/ 

Ludwig von Mises, The ANTI-CAPITALISTIC MENTALITY, p 39, D. VAN NOSTRAND COMPANY (Canada), LTD 1956, Mises Institute 2008, Mises.org

 

 

 

The Confidence Illusion: BSP’s Property Index Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility

 

Fake numbers lead to a phony economy, with fraudulent policies, chasing a mirage—Bill Bonner 

In this issue 

The Confidence Illusion: BSP’s Property Index Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility

Part I. The BSP’s Statistical Magic: From Crisis to Boom Overnight

I. A. Statistics as Spectacle — The Real Estate Index Makeover

I. B. The Tale of Two Indices: Deflation and Vacancies Erased: RPPI’s Parallel Universe of Price Optimism

I. C. Multiverse Economic Logic, Pandemic Pricing Without Mobility

I. D. BSP’s Statistical Signaling as Policy: Reflation by Design

Part II: The Confidence Transmission Loop and Liquidity Fragility

II. A. Confidence as Catalyst: BSP’s Keynesian Animal Spirits Playbook

II. B. Benchmark Rate Cuts and the Wealth Effect Mirage

II. C. Developer Euphoria: Liquidity, Debt, and Overreach

II. D. Affordability Fallout: Mispricing New Entrants

II. E. Vacancy vs. Real Demand: The Phantom of Occupancy, Market Hoarding and the Developer Divide

II. F. The Squeeze on Small Property Owners: Valuation Taxes and Hidden Costs

II. G. Sentiment Engineering: Policy Windfalls, Redistribution, Inequality

Part III: Policy Transmission: Consumer Debt, Market Dispersion, and the Mounting Fragility

III. A. Capital Market Transmission: Where Confidence Becomes Signal

III. B. Price Divergences and Latent Losses: Fort Bonifacio & Rockwell

III. C. Liquidity Spiral: From Losses to Liquidation Risk

III. D. Concentration Risk in Consumer Lending

III. E. Credit-Led Growth: Ideology and Fragility

III F. Employment Paradox and Inflation Disconnect

III G. Fragile Banking System: Liquidity Warnings Flashing

IV. Conclusion: The Dangerous Game of Inflating Asset Bubbles 

The Confidence Illusion: BSP’s Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility 

How benchmark-ism and sentiment engineering are used to buoy real estate and stock prices to back banks amid deepening stress. 

Part I. The BSP’s Statistical Magic: From Crisis to Boom Overnight 

I. A. Statistics as Spectacle — The Real Estate Index Makeover 

In a fell swoop, the real estate industry’s record vacancy dilemma has been vanquished by the BSP. 

All it took was for the monetary agency to overhaul its benchmark—replacing the Residential Real Estate Price Index (RREPI) with the Residential Property Price Index (RPPI). (BSP, July 2025) 

And voilà, prices have been perpetually booming, and there was never an oversupply to begin with! 

Regardless of the supposed “methodological upgrade”—anchored in hedonic regression and presented as aligned with global best practices—the index is built on assumptions and econometric modeling vulnerable to error or deliberate manipulation. 

Let us not forget: the BSP is a political agency. Its goals are shaped by institutional motives, and there’s no third-party audit of its inputs or underlying calculations. The only true litmus test for the data? Economic logic. 

I. B. The Tale of Two Indices: Deflation and Vacancies Erased: RPPI’s Parallel Universe of Price Optimism

Figure 1

Under the original RREPI, national price deflation was recorded during the pandemic recession: Q3 2020 (-0.4%), Q1 2021 (-4.2%), Q2 2021 (-9.4%). Deflation returned in Q3 2024 at -2.3%. (Figure 1, upper visual) 

But under RPPI? No deflation at all. 

Instead, the same quarters posted gains: Q3 2020 (6.3%), Q1 2021 (4.1%), Q2 2021 (2.4%), and Q3 2024 (7.6%). Not even a once-in-a-century health and mobility crisis could dent the official boom narrative. 

The new RPPI also shows a material deviation from the year-on-year (YoY) price changes in residential and commercial prices in Makati reported by the Bank for International Settlements (BIS). Figure 1, lower pane) 

The BSP’s narrative: “Property prices rise in Q1 2025, highest in the NCR.” 

Yet media sources paint a starkly different picture—perhaps reporting from another universe—or even permanently bullish analysts observed that the vacancy woes were intensifying. 

Just last April 29th, BusinessWorld noted: 

"The vacancy rate for residential property in Metro Manila will likely hit 26% by the end of this year, with condominium developers reining in their launches to dispose of inventory, according to property consultant Colliers Philippines." (italics added) 

On April 8th, GMA News also reported: 

"The oversupply of condominium units in Metro Manila is now estimated to be worth 38 months, as the available supply has continued to increase while there have been 9,000 cancellations, a report released by Leechiu Property Consultants (LPC)." (italics added) 

LPC reported last week that due to prevailing ‘soft demand,’ the NCR condominium oversupply slightly decreased to 37 months in Q2 2025. 

And in a more sobering global perspective, on July 10 BusinessWorld cited findings from the 2025 ULI Asia-Pacific Home Attainability Index: 

"The Philippine capital was identified as one of the most expensive livable cities in the Asia-Pacific region. Condominium prices in Metro Manila are now 19.8 times the median annual household income, far exceeding affordable levels. Townhouses are even more unattainable at 33.4 times the average income." (bold added) 

More striking still, price inflation has persisted amid record oversupply. 

I. C. Multiverse Economic Logic, Pandemic Pricing Without Mobility

Figure 2

The old RREPI captured the downturn in NCR condo units—four straight quarters of deflation in 2020–2021 and again in Q3 2024. But the new RPPI virtually erased this distress. According to its logic, speculative frenzy thrived even during ECQ lockdowns. (Figure 2, topmost graph) 

But real estate isn’t like equities. Its transactions require physical inspection, legal documentation, and bureaucratic transfer procedures. To suggest booming prices during lockdowns implies buyers magically toured properties, exchanged notarized documents, and signed title transfers—while under mobility restrictions. 

Only statistics can conjure such phenomena. 

When vacancies surged again in Q3 2024, RPPI recorded a +5.3% gain. One quarter of mild contraction in Q4 2023 (-4.8%) is the lone blemish on its multiverse logic. 

RPPI now behaves as if oversupply has nothing to do with prices—either the law of supply and demand has inverted, or RPPI reflects a speculative parallel reality 

I. D. BSP’s Statistical Signaling as Policy: Reflation by Design 

This isn’t just mismeasurement. It’s perceptional distortion. 

The BSP’s policy appears aimed at hitting “two birds with one stone”: rescue the real estate sector—and by extension, shore up bank balance sheets. 

Via rate cuts, RRR adjustments, market interventions, and benchmark-ism, statistics have been conscripted into policy signaling. 

Part II: The Confidence Transmission Loop and Liquidity Fragility 

II. A. Confidence as Catalyst: BSP’s Keynesian Animal Spirits Playbook 

Steeped in Keynesian orthodoxy, the BSP continues to lean on “animal spirits” to animate growth. Confidence—organic or manufactured—is viewed as a tool to boost consumption, inflate GDP, and quietly ease the government’s debt burden. 

Having redefined its benchmark index, the BSP now uses RPPI not just as data, but as a signaling instrument. 

It projects housing resilience at a time of monetary easing, giving shape to a narrative of strength amid systemic stress. RPPI becomes a cornerstone of "benchmark-ism"—targeting real estate equity holders, property developers, and households alike. 

II. B. Benchmark Rate Cuts and the Wealth Effect Mirage 

The timing is telling. 

This narrative engineering coincides with the underperformance of real estate equities. With property stocks dragging the Philippine Stock Exchange, "benchmark-ism" functions as a tactical lifeline to inflate valuations, revive confidence, and activate the so-called "wealth effect." 

Rising property prices are meant to induce consumption—not only among equity holders but among homeowners who perceive themselves as wealthier. But this is stimulus by optics, not fundamentals. 

II. C. Developer Euphoria: Liquidity, Debt, and Overreach 

This ideological windfall extends to property developers. Easier financial conditions could boost demand, sales, and liquidity—justifying their ballooning debt loads and encouraging further capital spending. 

Or, developers, emboldened by statistical optimism, may pursue growth despite structural weakness, compounding risks already embedded in their debt-heavy balance sheets. 

For example, the published debt of the top five developers (SM Prime, Ayala Land, Megaworld, Robinsons Land and Vista Land) has a 6-year CAGR of 7.88%, even as their cash holdings grew by only 2.16% (Figure 2, middle image) 

Additionally, the supply side real estate portfolio of Universal-commercial bank loans has accounted for 24% of production loans, total loans outstanding 20.68% net of Repos (RRP) and 20.28% gross of RRPs. This excludes consumer real estate loans, which in Q1 2025 accounted for 7.54%.  (Figure 2, lowest chart) 

But this is where the Keynesian blind spot emerges: artificially inflated prices distort economic signals. 

II. D. Affordability Fallout: Mispricing New Entrants 

In equities, inflated valuations misprice capital, leading to overcapacity and overinvestment in capital-intensive sectors like real estate or malinvestments. 

In housing, speculative price increases distort affordability, widening the gap not only between renters and owners, but also between incumbent homeowners and prospective buyers—including those targeting new project launches by developers. 

As developers capitalize on inflated valuations, pre-selling prices rise disproportionately to income growth, pushing ownership further out of reach for middle-income and first-time buyers. 

This dynamic not only excludes a growing segment of the population, but also risks creating inventory mismatches, where units are sold but remain unoccupied due to affordability constraints. 

The ULI Asia-Pacific Home Attainability Index pointed to such price-income mismatches 

II. E. Vacancy vs. Real Demand: The Phantom of Occupancy, Market Hoarding and the Developer Divide 

Vacancies extrapolate to an oversupply. 

Even when a single buyer or monopolist absorbs all the vacancies, this doesn’t guarantee increased occupancy. 

Demographics and socio-economic conditions—not speculative fervor—drive real demand. 

Meanwhile, rising property prices also translate to higher collateral values, encouraging further credit expansion and balance sheet leveraging in the hope of stimulating consumption. 

But this cycle of debt-fueled optimism risks compounding systemic fragility. 

Rising prices also create friction between small developers and elite firms, the latter leveraging cheap capital and financial heft to dominate the industry. 

Owners of large property portfolios can afford to hoard inventories, allowing prices to rise artificially while sidelining smaller players. 

II. F. The Squeeze on Small Property Owners: Valuation Taxes and Hidden Costs 

Beyond affordability, rising property prices carry compounding burdens for small-scale owners. 

As valuations climb, so do real property taxes, which are pegged to assessed values and can reach up to 2% annually in Metro Manila. 

Insurance premiums and maintenance costs—from association dues to repairs—rise in tandem. These escalating expenses disproportionately impact small owners, who lack the financial buffers of large developers or elite asset holders. 

The result is a quiet squeeze: ownership becomes not just harder to attain, but harder to sustain. 

II. G. Sentiment Engineering: Policy Windfalls, Redistribution, Inequality 

Governments reap fiscal windfalls via inflated valuations, using funds to back deficit spending. But these redistributions often fund projects detached from systemic equity or real productivity.

Despite the optics, only a sliver of the population truly benefits. 

Aside from the government, the other primary beneficiaries of asset inflation are the elite of the Forbes 100, not the broader population 

This "trickle-down strategy", rooted in sentiment and asset inflation, risks deepening inequality and fueling balance sheet-driven malinvestments. 

Part III: Policy Transmission: Consumer Debt, Market Dispersion, and the Mounting Fragility 

III. A. Capital Market Transmission: Where Confidence Becomes Signal 

Here is how the easing-benchmarkism policy is being transmitted at the PSE.

Figure 3

The PSE’s property index sharply bounced by 8.2% (MoM) in June 2025, while the bank-led financial index dropped 4.9%. This divergence reveals that asset reflation via statistical optics has buoyed developers—but failed to restore investor confidence in the banking sector. (Figure 3, topmost window) 

During the first inning of the ‘propa-news’ campaign that “Easing Cycle equals Economic Boom” in Q3 2024, both indices had surged—property by 16.41% and financials by 19.4%. But Q2 2025 tells a different story: while property stocks outperformed the PSE again, financial stocks weighed it down. (Figure 3, middle diagram) 

This magnified dispersion reflects the imbalance at play. As a ratio to the overall PSE, property stocks are gaining market cap dominance. At the same time, the free float market capitalization of the PSEi 30’s top three banks have declined—mirrored by the rising share of the two biggest property developers. (Figure 3, lowest visual) 

Unless bank shares recover, gains in the property sector will likely be capped. After all, property developers remain the biggest clients of the Philippine banking system. 

Put another way: whatever confidence boost the BSP engineers through easing and revised benchmarks, markets eventually push back against artificial gains. 

Signal may dominate short-term sentiment—but fundamentals reclaim price over time. 

III. B. Price Divergences and Latent Losses: Fort Bonifacio & Rockwell 

There is more.

Figure 4

The widening divergence in pre-selling and secondary prices of condominiums in Fort Bonifacio and Rockwell Center signifies a deeper signal: the BSP’s implicit rescue of banks via the property sector is being tested on the ground. (Figure 4, topmost window) 

The widening price gap implies mounting losses for pre-selling buyers—early investors who are now exposed to valuation markdowns in the secondary market.

So far, these losses have not translated into Non-Performing Loans (NPLs). Continued financing, sunk-cost inertia, buyer risk aversion, and an economy growing more through credit expansion than productivity have suppressed the impact.

But if these losses scale—or if the economy tips into recession or stagnation—underwater owners may surrender keys. This leads to cascading vacancies and NPLs, raising systemic risk. 

III. C. Liquidity Spiral: From Losses to Liquidation Risk 

Losses, once translated into constrained liquidity, spur escalating demand for liquid assets. This pressure breeds forced liquidations—not just by individual buyers of pre-selling projects, developers but among holders of debt-financed real estate. 

Banks, as financial intermediaries, face direct exposure. When collateral values fall, they may issue a ‘collateral call’—requiring borrowers to post more assets—or a ‘call loan,’ demanding immediate repayment.

If rising NPLs escalate into operational or capital deficits, banks themselves become sellers—dumping assets to raise cash. This synchronized selloff in a buyer’s market fuels fire sales and elevates the risk of a broader debt crisis.

III. D. Concentration Risk in Consumer Lending

Last week, the Inquirer cited a Singaporean fintech company which raised concern about the extreme dependence on credit card usage in the Philippines, noting: “The 425-percent debt-to-income ratio in the Philippines—the worst in the region—indicates a ‘severe financial stress.’” (Figure 4, middle image)

Downplaying this, an industry official clarified that since the total credit card contracts were at 20 million, credit card debt averaged 54,000 pesos per contract. Since the number of individuals covered by the contracts was not identified, a person holding multiple credit card debt contracts could, collectively, contribute to a debt profile resembling the 425% debt-to-income ratio (for contract holders).

Based on BSP’s Q4 2023 financial inclusion data, only a significant minority—just 8.1% of the population as of 2021 (World Bank Findex)—carry credit card debt. Even if this figure has doubled or tripled, total exposure remains below 30%, highlighting mounting concentration risks among debt-laden consumers. (Figure 4, lowest table)

III. E. Credit-Led Growth: Ideology and Fragility

The seismic shift toward consumer lending has been driven not only by interest rate caps on credit cards, but by ideological faith in a consumer-driven economy.

Universal and commercial bank consumer credit surged 23.7% year-on-year in May. Credit card loans alone zoomed by 29.4%, marking the 34th consecutive month of 20%+ growth.

Figure 5

From January 2022 to May 2025, consumer and credit card loan shares climbed from 8.8% and 4.4% to 12.7% and 7.5%, respectively. Last May, credit card debt represented 59% of all non-real estate consumer loans. (Figure 5, upper chart) 

Yet how much of credit card money found its way into supporting speculative activities in the stock market and real estate? 

What if parts of bank lending to various industries found their way into asset speculation? 

Once disbursed, banks and the BSP have limited visibility on end-use—adding opacity to the cycle they’re stimulating. 

III F. Employment Paradox and Inflation Disconnect 

Interestingly, this all-time high in debt coincides with near-record employment rates. The May employment rate rose to 96.11%, not far from the all-time highs of 96.9% in December 2023 and 2024, and June 2024. The employed population of 50.289 million last May was the second highest ever. (Figure 5, lowest graph) 

Yet CPI inflation remains muted. Despite collapsing rice prices driven by the Php 20 rollout, inflation ticked up only slightly in June—from 1.3% to 1.4%. 

With limited savings and shallow capital market penetration, the Philippines faces a precarious juncture. What happens when credit expansion and employment reverses from these historic highs? 

And this won’t affect only residential real estate but would worsen conditions of every other property malinvestments like shopping malls/commercial, ‘improving’ office, hotel and accommodations etc. 

III G. Fragile Banking System: Liquidity Warnings Flashing 

Beneath the surface, bank stress is already visible.

Figure 6

Even as NPLs remain officially low—possibly understated—liquidity strains are worsening:

-Cash and due from banks posted a modest 3.4% MoM increase in May—but fell 26.4% YoY

(Figure 6, topmost image)

-Deposit growth edged from 4.04% in April to 4.96% in May

-Cash-to-deposit ratio bounced slightly from 9.68% to 9.87%, yet remains at its lowest level since at least 2013

-Liquid assets-to-deposit ratio fell from 48.29% in April to 47.5% in May

-Bank investment growth slowed from 8.84% to 6.5% (Figure 6, middle diagram)

-Portfolio growth dropped from 7.82% to 5.25% 

Despite these constraints, banks continued lending. 

Interbank lending (IBL) surged, pushing the Total Loan Portfolio (inclusive of IBL and Reverse Repos) from 10.2% to 12.7%, sending the loan-to-deposit ratio to its highest level since March 2020. 

Beyond Held-to-Maturity (HTM) assets, underreported NPLs—particularly in real estate lending—may be compounding the liquidity strain and masking deeper fragility. The surge in HTMs has coincided with a steady decline in cash-to-deposit ratios, signaling stress beneath the statistical surface. (Figure 6, lowest visual) 

IV. Conclusion: The Dangerous Game of Inflating Asset Bubbles 

Despite the Q3 2024 surge in the Property Index—helping power the PSEi 30 upward—combined with a 6.7% rebound in the old real estate index in Q4, vacancy rates soared to record highs in Q1 and remain near all-time highs as of Q2 2025. 

This unfolds amid surging consumer and bank credit, all-time high public liabilities fueled by near-record deficit spending, and peak employment rates. 

Ironically, the distortions in stock markets—and the engineered statistical illusions embedded in the old property index—have barely moved the needle against real estate oversupply, as measured by vacancy data.  

Not only has the BSP sustained its aggressive easing campaign, it is now amplifying statistical optics to reignite animal spirits—hoping to hit two birds with one stone: rescuing property sector balance sheets as a proxy for bank support. 

Yet inflating asset bubbles magnifies destabilization risks—accelerating imbalances and expanding systemic leverage that bank balance sheets already betray. 

Worse, the turn toward benchmark-ism and sentiment engineering in the face of industry slowdown signals more than strategy—it reeks of desperation.

When monetary tools fall short, propaganda steps in to fill the gap—instilling false premises to manufacture resilience.

And the louder the optimism, the deeper the dissonance. 

____

References 

Bangko Sentral ng Pilipinas BSP's new Residential Property Price Index more accurately captures market trends June 27, 2025 bsp.gov.ph

 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.