The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

Historical research on bank runs indicates that the reason people run is run is not fear of people running. People typically ran when the bank was already insolvent. Healthy purpose of closing the bank before the bank lost even more money. True, the losses were unevenly distributed, depending on whether you got on the front of the line or the back of the line. In a way, that provides a useful incentive mechanism: monitor your bank and don't rely on other people to monitor it for you—Lawrence White

In this issue

The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

I. From Full Reserves to Fractional Banking: The Risks of a Zero-Bound RRR

II. Has the BSP’s "Easing Cycle"—Particularly the RRR Cut—Eased Liquidity Strains?

III. Bank Assets: A Tale of Contradictions: Booming Loans and Liquidity Pressures

IV. Bank Credit Boom Amid Contradictions: Soaring Credit Card NPLs as Real Estate NPLs Ease

V. Investments: A Key Source of Liquidity Pressures

VI. Hidden Risks in Held-to-Maturity (HTM) Securities: Government Debt

VII. Slowing Deposit Growth and the Structural Changes in the Banking System’s Asset Distribution

VIII. Liquidity Constraints Fuels Bank Borrowing Frenzy

IX. PDIC’s Doubled Deposit Insurance: A Confidence Tool or a Risk Mitigant?

X. Conclusion: Band-aid Solutions Magnify Risks

The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

Facing the risks from lower bank reserve requirements, the BSP may have pulled a confidence trick by doubling deposit insurance. But will it be enough to avert the ongoing liquidity stress?

I. From Full Reserves to Fractional Banking: The Risks of a Zero-Bound RRR 

Full reserve banking originated during the gold standard era, where banks acted as custodians of gold deposits and issued paper receipts fully backed by gold reserves. This system ensured financial stability by preventing the expansion of money beyond available reserves. However, as banks realized that depositors rarely withdrew all their funds simultaneously, they began lending out a portion of deposits, leading to the emergence of fractional reserve banking.

Over time, governments institutionalized this practice, largely due to its political convenience—enabling the financing of wars, welfare programs, and other government expenditures. This shift was epitomized by 1896 Democratic presidential candidate William Jennings Bryan's famous speech in which he declared, "You shall not crucify mankind upon a cross of gold!" 

Governments reinforced this transition through the creation of central banks and an expanding framework of regulations, including deposit insurance. Ultimately, these policies culminated in the abandonment of the gold standard, most notably with the Nixon Shock of August 1971. 

While fractional reserve banking has facilitated economic growth by expanding credit, it has also introduced significant risks. These include bank runs and liquidity crises, as seen during the Great Depression, the 2008 financial crisis, and the 2023 U.S. banking crisis; inflationary pressures from excessive credit creation; and moral hazard, where banks engage in riskier practices knowing they may be bailed out. 

The system’s reliance on high leverage further contributes to financial fragility. 

The risks of fractional reserve banking are amplified when the statutory reserve requirement (RRR) approaches zero. A zero-bound RRR effectively removes regulatory constraints on the proportion of deposits banks can lend, increasing liquidity risk if sudden withdrawals exceed available reserves. 

This heightens the probability of bank runs, making institutions more dependent on central bank intervention for stability. 

Additionally, a near-zero RRR expands the money multiplier effect, increasing the risks of excessive credit creation, exacerbating asset-liability mismatches, fueling asset bubbles, and intensifying inflationary pressures—ultimately turning individual failures into systemic vulnerabilities that repeatedly require central bank intervention. 

Without reserve requirements, banking stability relies entirely on the presumed effectiveness of capital adequacy regulations, liquidity buffers, and central bank oversight, increasing systemic dependence on monetary authorities—further assuming they possess both full knowledge and predictive capabilities (or some combination thereof) necessary to contain or prevent disorderly outcomes arising from the buildup of unsustainable financial and economic imbalances (The knowledge problem). 

Moreover, increased reliance on these authorities leads to greater politicization of financial institutions, fostering inefficiencies such as corruption, regulatory capture, and the revolving door between policymakers and industry players—further distorting market incentives and deepening systemic fragility. 

Consequently, while a zero-bound RRR enhances short-term credit availability, it also raises long-term risks of financial instability and contagion during crises. 

At its core, zero-bound RRR magnifies the inherent fragility of fractional reserve banking, increasing systemic risks and reliance on central bank intervention. By removing a key buffer against liquidity shocks, it transforms banking into a highly unstable system prone to crises. 

II. Has the BSP’s "Easing Cycle"—Particularly the RRR Cut—Eased Liquidity Strains?

Businessworld, March 15, 2025: THE PHILIPPINE BANKING industry’s total assets jumped by 9.3% year on year as of end-January, preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed. Banks’ combined assets rose to P27.11 trillion as of end-January from P24.81 trillion in the same period a year ago. Month on month, total assets slid by 1.2% from P27.43 trillion as of end-December. 

In the second half (2H) of 2024, the Bangko Sentral ng Pilipinas (BSP) launched its "easing cycle," implementing three interest rate cuts and reducing the reserve requirement ratio (RRR) on October 25.

A second RRR reduction is scheduled for March 28, 2025, coinciding with the Philippine Deposit Insurance Corporation (PDIC) doubling its deposit insurance coverage, effective March 15.

Yet, despite these measures, the Philippine GDP growth slowed to 5.2% in 2H 2024—a puzzling decline amid record-high public spending, unprecedented employment rates, and historic consumer-led bank borrowing. 

Has the BSP’s easing cycle, particularly the RRR cuts, alleviated the liquidity strains plaguing the banking system? The evidence suggests otherwise. 

III. Bank Assets: A Tale of Contradictions: Booming Loans and Liquidity Pressures 

Philippine bank assets consist of cash, loans, investments, real and other properties acquired (ROPA), and other assets. In January 2025, cash, loans, and investments dominated, accounting for 9.8%, 54.2%, and 28.3% respectively—totaling 92.3% of assets.

Figure 1

Loan growth has been robust. The net total loan portfolio (including interbank loans IBLs and reverse repos RRPs) surged from a 10.7% year-on-year (YoY) increase in January 2024 to 13.7% in January 2025.

As a matter of fact, loans have consistently outpaced deposit growth since hitting a low in February 2022, with the loans-to-deposit ratio accelerating even before the BSP’s first rate cut in August 2024. (Figure 1, topmost graph)

Historical trends, however, reveal a nuanced picture.

Loan growth decelerated when the BSP hiked rates in 2018 and continued to slow even after the BSP started cutting rates. Weak loan demand at the time overshadowed the liquidity boost from RRR cuts. (Figure 1, middle image)

Despite the BSP reducing the RRR from 19% in March 2018 to 12% in April 2020—coinciding with the onset of the pandemic—loan growth remained weak relative to deposit expansion. 

It wasn’t until the BSP's unprecedented bank bailout package—including RRR cuts, a historic Php 2.3 trillion liquidity injection, record-low interest rates, USD/PHP cap, and various bank subsidies and relief programs—that bank lending conditions changed dramatically. 

Loan growth surged even amid rising rates, underscoring the impact of these interventions. 

Last year’s combination of RRR and interest rate cuts deepened the easy money environment, accelerating credit expansion. 

The question remains: why? 

IV. Bank Credit Boom Amid Contradictions: Soaring Credit Card NPLs as Real Estate NPLs Ease 

Authorities claim credit delinquencies remain "low and manageable" despite a January 2025 uptick. Since peaking in Q2 2021, gross and net NPLs, along with distressed assets, have declined from their highs. (Figure 1, lowest chart)

Figure 2

This stability is striking given record-high consumer credit—the banking system’s fastest-growing segment—occurring alongside slowing consumer spending.  (Figure 2, topmost window)

While credit card non-performing loans (NPLs) have surged, their relatively small weight in the system has muted their overall impact.

Real estate NPLs have paradoxically stabilized despite a deflationary spiral in property prices in Q3 2024.

Real estate GDP fell to just 3% in Q4—its lowest level since the pandemic recession—dragging its share of total GDP to an all-time low. (Figure 2, middle visual)

Record bank borrowings, a faltering GDP, and price deflation amidst stable NPLs—this represents 'benchmark-ism,' or 'putting lipstick on a statistical pig,' at its finest.

Ironically, surging loan growth and low NPLs should signal a banking industry awash in liquidity and profits.

Yet how much of unpublished NPLs have been contributing to the bank's liquidity pressures?

Still, more contradictory evidence.

V. Investments: A Key Source of Liquidity Pressures 

Bank investments, another major asset class, grew at a substantially slower pace, dropping from 10.7% YoY in December 2024 to 5.85% in January 2025.

This deceleration stemmed from a sharp slowdown in Available-for-Sale (AFS) assets (from 20.45% to 12% YoY) and Held-for-Trading (HFT) assets, which, despite a 22.17% YoY rise, slumped from December’s 117% spike. This suggests banks may have suffered losses from short-term speculative activities, potentially linked to the PSEi 30’s 11.8% YoY and 10.2% MoM plunge in January. (Figure 2, lowest chart)

Ironically, the Financial Index—comprising seven listed banks—rose 15.23% YoY and 0.72% MoM, indicating that losses in bank financial assets stemmed from non-financial equity holdings.

Figure 3

Despite easing interest rates, market losses on the banks’ fixed-income trading portfolios remained elevated, improving (33.5% YoY) only slightly from Php 42.4 billion in December to Php 38 billion in January. (Figure 3, topmost pane) 

VI. Hidden Risks in Held-to-Maturity (HTM) Securities: Government Debt 

Yet, HTM assets declined just 0.5% YoY. Given that 10-year PDS rates remain elevated, HTMs are likely to reach new record highs soon. (Figure 3, middle image)

Banks play a pivotal role in supporting the BSP’s liquidity injections by monetizing government securities. Their holdings of government debt (net claims on central government—NcoCG) reached an estimated 33% of total assets in January 2025—a record high.  (Figure 3, lowest graph)

Figure 4

Public debt hit a fresh record of Php 16.3 trillion last January 2025. (Figure 4, topmost diagram)

Valued at amortized cost, HTM securities mask unrealized losses, potentially straining liquidity. Overexposure to long-duration HTMs amplifies these risks, while rising government debt holdings heighten banks’ sensitivity to sovereign risk.

With NCoCG at a record high, this tells us that banks' HTMs are about to carve out another fresh milestone in the near future.

In short, losses from market placements and ballooning HTMs have offset the liquidity surge from a lending boom, undermining the BSP’s easing efforts.

VII. Slowing Deposit Growth and the Structural Changes in the Banking System’s Asset Distribution

Deposit growth should ideally mirror credit expansion, as newly issued money eventually finds its way into deposit accounts.

Sure, the informal economy remains a considerable segment. However, unless a huge amount of savings is stored in jars or piggy banks, it’s unlikely to keep a leash on the money multiplier.

The BSP’s Financial Inclusion data shows that more than half of the population has some form of debt outside the banking system. This tells us that credit delinquencies are substantially understated—even from the perspective of the informal economy

Yet, bank deposit liabilities grew from 7.05% YoY in December 2024 to 6.8% in January 2025, led by peso deposits (7% YoY), while FX deposits slowed from 7.14% to 6.14%. Peso deposits comprised 82.8% of total liabilities. (Figure 4, middle image)

Since 2018, deposit growth has been on a structural downtrend, with RRR cuts failing to reverse this trend. (Figure 4, lowest visual)

Figure 5

The gap between the total loan portfolio (excluding RRPs and IBLs) and savings widened, with TLP growth rising from 12.7% to 13.54% YoY, while savings growth doubled from 3.3% to 6.8%. (Figure 5, topmost graph)

How did these affect the bank’s cash reserves?

Despite the October 2024 RRR cut, cash reserves contracted 1.44% YoY in January 2025. In peso terms, cash levels rebounded slightly from an October 2024 interim low—mirroring 2019 troughs—but this bounce appears to be stalling. (Figure 5, middle chart)

The ongoing liquidity drain has effectively erased the BSP’s historic cash injections.

The bank's cash and due-to-bank deposits ratio has hardly bounced despite the RRR cuts from 2018 to the present! (Figure 5, lowest pane)

Figure 6

Liquidity constraints are further evident in the declining liquid-to-deposit assets ratio. (Figure 6, topmost pane)

In perspective, the structural changes in operations have led to a pivotal shift in the distribution of the bank's assets. (Figure 6, middle graph)

Cash’s share of bank assets has shrunk from 23.1% in October 2013 to 9.8% in January 2025.

While the share of loans grew from 45.3% in November 2010 to a peak of 58.98% in May, it dropped to a low of 51.6% in March 2024 before partially recovering.

Meanwhile, investments, rebounding from a 21.42% trough in June 2020, have plateaued since the BSP’s 2022 rescue package.

Still, the Philippine banking system continues to amass significant economic and political clout, effectively monopolizing the industry, as its share of total financial resources reached 83.64% in 2024. How does this mounting concentration risk translate to stability? (Figure 6, lowest chart)

VIII. Liquidity Constraints Fuels Bank Borrowing Frenzy 

In addition to the 'easy money' effect of fractional banking's money multiplier, banks still require financing for their lending operations.

Figure 7

Evidence of growing liquidity constraints, exacerbated by insufficient deposit growth, is seen in banks' aggressive borrowing from capital markets. 

Bank borrowing, comprising bills and bonds payable, reached a new record of PHP 1.78 trillion in January, marking a 47.02% year-over-year increase and a 6.5% month-over-month rise! (Figure 7, topmost diagram) 

Notably, bills payable experienced a 67% growth surge, while bonds payable increased by 17.5%.  The strong performance of bank borrowing has resulted in an increase in their share of overall bank liabilities, with bills payable now accounting for 5.1% and bonds payable for 2.43% in January. (Figure 7, middle pane) 

In essence, banks are competing fiercely among themselves, with non-bank clients, and the government to secure funding from the public's strained savings. 

Moreover, although general reverse repo usage has decreased, largely due to BSP actions, interbank reverse repos have surged to their second-highest level since September 2024. (Figure 7, lowest chart) 

The increasing scale of bank borrowings, supported by BSP liquidity data, reinforces our view that banks are struggling to maintain system stability. 

IX. PDIC’s Doubled Deposit Insurance: A Confidence Tool or a Risk Mitigant? 

The doubling of the Philippine Deposit Insurance Corporation's (PDIC) deposit insurance coverage took effect on March 15th. 

The public is largely unaware that this measure is linked to the second phase of the reserve requirement ratio (RRR) cut scheduled for March 28th. 

In essence, the Bangko Sentral ng Pilipinas (BSP), through its attached agency the PDIC, is utilizing the enhanced deposit insurance as a confidence-building measure to reinforce stability within the banking system. 

Inquirer.net, March 15, 2025: The Philippine Deposit Insurance Corp. (PDIC)—which is mandated to safeguard money kept in bank accounts —finally implemented the new maximum deposit insurance coverage (MDIC) of P1 million per depositor per bank, which was double the previous coverage of P500,000. The expanded MDIC is projected to fully insure over 147 million accounts in 2025, or 98.6 percent of the total deposit accounts in the local banking system. In terms of amount, depositor funds amounting to P5.3 trillion will be safeguarded by the PDIC, accounting for 24.1 percent of the total deposits held by the banking sector. To compare, the ratio of insured accounts under the old MDIC was at 97.6 percent as of December 2024. In terms of amount, the share of insured funds to total deposits was at 18.4 percent before. It was the amendments to the PDIC charter back in 2022 that allowed the state insurer to adjust the MDIC based on inflation and other relevant economic indicators without the need for a new law. (bold added)

ABS-CBN News, March 14: PDIC President Roberto Tan also assured the public that PDIC has enough funds to cover all depositors even with a higher MDIC. The Deposit Insurance Fund (DIF) is around P237 billion as of December 2024. The ration of DIF to the estimated insured deposits (EID) is 5% this 2025, which Tan said remains adequate to meet potential insurance risks. (bold added) 

Our Key Takeaways: 

1) An Increase in Compensation rather than Coverage Ratio, Yet Systemic Coverage Remains Low

-The total insured deposit amount is capped at PHP 1 million per depositor.

98.6% of accounts are fully insured, up from 97.6% previously.

-The insured deposit amount increased to PHP 5.3 trillion (24.1% of total deposits) from PHP 3.56 trillion (18.4%) prior to the MDIC.

2) Systemic Risk and Vulnerabilities

-Most of the increase in insured deposits stems from small accounts.

-Large corporate and high-net-worth individual deposits remain largely uninsured, maintaining systemic vulnerability.

3) PDIC’s Coverage Limitations

-The PDIC only covers BSP-ordered closures, excluding losses due to fraud.

-If bank failures are triggered by fraud (e.g., misreported loan books, hidden losses), depositor panic may escalate before the PDIC intervenes.

-Runs on solvent banks could still occur if system trust weakens.

Figure/Table 8 

4) Mathematical Constraints on PDIC's Deposit Insurance Fund (DIF) and Assets

-The PDIC's 2023 total assets of PHP 339.6 billion account for only 1.74% of total deposits. (Figure/Table 8)

-The Deposit Insurance Fund (DIF) of PHP 237 billion represents a mere 6.7% of insured deposits.

-PDIC assets and DIF account for 3.46% and 2.42% of the deposit base of the four PSEi 30 banks.

-In the event of a mid-to-large bank failure, the DIF would be insufficient, necessitating government or BSP intervention.

5) The Systemic Policy Blind Spot

-Such policy assumes an "orderly" distribution of bank failures—small banks failing, not large ones. In reality, tail risks (big bank failures) drive financial crises, not small-bank failures.

6) Impact of RRR Cuts on Risk-Taking Behavior

-The second leg of the RRR cut in March 2025 injects liquidity, potentially encouraging higher risk-taking by banks.

-Once again, the increase in deposit insurance likely serves as a confidence tool rather than a genuine risk mitigant.

7) Rising risk due to moral hazard: The increased insurance may encourage riskier behavior by both depositors and banks.

8) Consequences of Significant Bank Failures

-If funds are insufficient, the Bureau of Treasury might cover the DIF gap. Such a bailout would expand the fiscal deficit, with the BSP likely to monetize debt.

-A more likely scenario is that the BSP intervenes directly, as the PDIC is an agency of the BSP, by rescuing depositors through liquidity injections or monetary expansion.

In both scenarios, this would amplify inflation risks and the devaluation of the Philippine peso, likely exacerbated by increased capital flight and a higher risk premium on peso assets. 

X. Conclusion: Band-aid Solutions Magnify Risks 

The BSP’s easing cycle has fueled a lending boom, masked NPL risks, and propped up government debt holdings, yet liquidity remains elusive. Cash reserves are shrinking, deposit growth is faltering, and banks are borrowing heavily to stay afloat. 

The PDIC’s insurance hike offers little systemic protection, leaving the banking system vulnerable to tail risks. A mid-to-large bank failure would likely burden the government or BSP, triggering further unintended consequences. 

As contradictions mount, a critical question persists: can this stealth loose financial environment sustain itself, or is it a prelude to a deeper crisis?

 

Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell

 

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen—Ludwig von Mises

 

In this issue

 

Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell

I. An Unexpected Rebound of the February CPI

II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows

III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023

IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation

V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged

VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs

 

Stagflation Ahoy! February CPI Rebounds as January Employment Rate Fell

 

The rebound in February CPI reflects the loosening of financial conditions as the January employment rate surrenders part of the historic December gains—leading to the prospects of stagflation.

I. An Unexpected Rebound of the February CPI

 

Reuters, March 5, 2024: Philippine annual inflation sped up for the first time in five months in February because of faster increases in food and transport costs, likely giving the central bank little reason to consider lowering interest rates. The consumer price index (CPI) rose 3.4% in February from a year earlier, the statistics agency said on Tuesday, which was above the previous month's 2.8% and the market forecast of 3.1%, but still within the central bank's 2% to 4% target for the year.

 

In the establishment's statistical guessing game of "pin the tail on the donkey," the financial punditry generally missed their single number estimates of February 2024's CPI.

 

Compared to the BSP, the February CPI of 3.4% fell within their 80-bps range (2.6% to 3.6%) projection, which makes them look credible.

Figure 1

 

But as noted in my March 01st tweet, the markets appeared to have smelled the comeback of inflation. (Figure 1, upper picture)

 

Rising short-term yields have been narrowing the gap with the BSP's official rates, which means that Treasury traders have begun to realign their outlook. 

 

In a phrase, the Treasury markets have called the BSP's "hawkish" stance bluff.  The intent of BSP's hikes is for headline consumption.

 

Aside from Treasury activities, financial easing has been evident with the record high in public debt, an all-time high in the bank-dominated Total Financial Resources (TFR), historic consumer and public debt, and the surging PSEi 30.

 

Yet, the same establishment has not seen the emergence of the second wave of the incumbent inflation cycle.

 

II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows

 

The present inflation cycle has lasted nine years (thus far) and counting. (Figure 1, lower visuals)

 

Instead, they have instilled in the public that inflation has been supply-side driven, which implies “transitory,” while demand for the mainstream represents a “second-order” effect.  

 

The embedded stylized assumption is that price increases of primary commodities trigger price “inelasticities” in other areas, funded by “elastic” demand (total income, disposable income, and access to credit and savings)!   The law of abundance substitutes the law of scarcity!  Incredible.

 

That’s right, “transitory” equals nine years of inflation?

 

After all, unless markets are allowed to clear or function normally, interim price increases from supply imbalances will tend to be “transitory.”

 

That inflation comes in waves of a cycle points to STRUCTURAL demand or money/liquidity-driven inflation.

 

Thus, the narrative alluding to “supply-side” causes defies the law of demand and supply.

 

When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation, but on the contrary, the bank is regarded as an inflation fighter (Shostak, 2022) [bold added]

 

Essentially, denying the role of money and credit in the CPI protects the “integrity” of the BSP.

 

Nonetheless, a more realistic account of the demand-supply imbalances of the Philippine manufacturing conditions last February, as reported by the S&P PMI.

 

The imbalance between growing demand requirements and insufficient output to complete sales put a strain on inventories. Companies often utilized stocks to meet production requirements. February data highlighted fresh falls across both pre- and post-production inventories. Moreover, the latter was depleted at the strongest rate since January 2022. (S&P Global, 2024) [bold added]

 

The question is, what has been driving domestic demand”

 

Further, last February, Core inflation slipped from 3.8% to 3.6%, even as the headline CPI bounced from 2.8% to 3.4%.

 

Figure 2

 

While rising oil prices could increase pressure on the Transport CPI and spill over to the other economic "supply" aspects, this would depend on domestic demand.  (Figure 2, upper diagram)

 

Proof? Oil price volatility (US WTIC) hardly affected Japan's three decades of stagnation (largely disinflation). (Figure 2, lower chart)

 

While solid evidence that could validate a potential inflection point of the CPI has yet to emerge, the boost in February's food and transport CPI may be appetizers. 

 

But inflation's third wave of its long-term cycle, a simulacrum of the 1950s to the early 1980s, has been lurking in the corner.

 

III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023

 

In other related news, authorities reported a surge in unemployment last January as labor participation plunged.

 

Inquirer.net, March 8, 2024: The country’s unemployment rate jumped to 4.5 percent in January from the record-low rate of 3.1 percent in December, with fewer job seekers also recorded in the first month of the year. A nationwide survey of 169,700 households showed there were 2.15 million unemployed Filipinos in January, higher than 1.60 million recorded in December, the Philippine Statistics Authority (PSA) reported Friday…The increase in unemployment rate coincided with the drop in the country’s labor force, which represents people aged 15 and above who are actively looking for jobs. In January, 48.09 million people were part of the labor force, down from 52.13 million in December. That was equivalent to a labor force participation rate of 61.1 percent in January, lower than 66.6 percent in the previous month.

 

The government produces statistics with bizarre and contradictory logic.

 

After a historic December, the January Philippine Statistics Authority (PSA) labor survey data reported a dramatic fall in employment and labor participation rates.

 

The employment rate, which hit an all-time high of 96.9% last December, slipped to a four-month low of 95.5% this January.

 

On the other hand, the labor participation rate plummeted from 66.6% in December to a five-month low of 61.1% last January.

 

On a YoY basis, here are several factors to consider:

 

-Population (15 years and older) grew by 2.01% or 1.55 million to 78.66 million

-But the labor force fell by 3.3% or 1.63 million to 48.09 million

-As a result, the unemployed population plunged by 9.4% or 222,000 to 2.15 million

-Or, the employed population slipped by 3% or 1.41 million to 45.943 million

-Hardly mentioned is that the "not in the labor force" sector jumped 11.6% or 3.18 million to 30.562 million

 

The formula:

 

Labor participation rate = labor force / total population

 

Unemployment or employment rate = unemployed (or employed) population /labor force.

 

Population = Labor force + not in the labor force

 

The Non-Labor Force as defined by the PSA: "Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disability, or retired persons."

 

That is to say, the non-labor force is the euphemism of the "informal economy."

 

IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation

 

Some critical insights:

Figure 3

1. The government makes it appear that employers treat employment like the stock market, characterized by amplified volatility. 

 

Employers recruited and discharged employees as if they were automatons, not subject to domestic labor regulations.

 

The month-on-month change in January was the largest since 2021! (Figure 3, topmost window)

 

2. The plunge in the labor force translates to a substantial increase in the non-labor force. (Figure 3, middle image)

 

The PSA barely mentions that the non-labor force accounted for 38.9% of the population—the second-highest level since July 2023!  Amazing.

 

So, was the sudden surge in January 2024's non-labor population due to "housewives, students, persons with disability, or retired persons?"

 

Or was it that January 2024's data was an attempt to rectify the misstatement of December 2023's record employment rate?

 

Or, could employers be anticipating the ratification of high minimum wages?

 

Or could it be that these were symptoms of a deterioration of the formal economy, which caused a shift to the informal economy?

 

3. Authorities didn't say what caused the sharp decrease in the labor force. 

 

Still, the labor force remains the divisor of employment and unemployment rates, which likely means that in moving a chunk of the labor force to the non-labor force, the labor survey vastly understates the unemployment and exaggerates the employment rates.

 

4.  In January, though part-time jobs (as a share of the labor force) fell more, even full-time jobs slumped—which likely means that the January slump partly represented the "excess" temporary hiring last December. (Figure 3, lowest graph)

Figure 4

 

5. The jobs hit by the job retrenchments were the trade and agricultural sectors (YoY and MoM)!  (Figure 4, topmost pane)

 

Or, the most significant sectors of the labor force bore the brunt of the labor culling measures.

 

Importantly, could consumer retrenchment have spurred a massive exodus of wholesale and retail jobs?  What then happened to the consumer economy?  

 

Could this also signify the growing vacancies in retail commercial real estate?

 

And does the shortfall in agriculture workers translate to more "supply-side" problems for the industry?  Or does this represent a sudden growth in productivity?

 

6. The job survey anchors the GDP and the CPI, which extrapolates to further a substantial weakening last January.

 

The universal commercial bank's consumer credit card portfolio sustained a brisk growth rate last January despite the fall in the employed population. (Figure 4, middle chart)

 

If the labor survey data reflected accurate estimates, does this herald a spike in credit card NPLs?

 

Resembling part of the Phillips curve, in 2022, increases in employment dovetailed with the rise of the CPI.  However, the historic employment rates in Q4 2023 have emerged with falling CPI accompanied by a slowdown in household consumption—even as consumer credit has risen to all-time highs!  (Figure 4, lowest graph)

 

Or could the falling CPI mean the swelling of the unemployed with a time lag?  Or could this signify "stagflation"—a resurgent inflation amidst a higher unemployment rate?

In my humble opinion, stagflation is the likely outcome in the fullness of time.

 

Finally, when some polls say that firms are likely to hike wages—that would be a pipe dream.  It may be true for some job specializations.  But it is unlikely to occur in the face of the general labor force reeling under the weight of an enormous non-labor force population plus the unemployed.

V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged

 

The employment data and the CPI are closely related, which implies causation with monetary conditions.

 

As mentioned above, February's CPI bounce reflected financial easing.

 

Aside from the unparalleled surge in the Bank-led Total Financial Resources (TFR) and the organized pumps of the PSEi 30 (7.63% YTD and 16.2% from the October 2023 lows, as of March 8th), the BSP noted that Universal-Commercial bank credit rebounded last January.

Figure 5

Universal commercial bank production loans grew 5.9%, representing a 3-month high.  In the meantime, the growth rate of consumer loans reaccelerated to 25.2%—a 15-month high! (Figure 5, topmost image)

 

Though the UC bank credit card growth has mainly anchored this phenomenal growth rate, the expansion was broad-based.  (Figure 5, middle visuals)

 

Credit card loans zoomed by 30.1%, signifying six consecutive months of over 30% clip.  The salary loan growth rate also picked up tempo—up by 14.6%—a 6-month high!   The 19.7% growth rate in auto loans signified was the highest since June 2020!

 

In all, the metamorphosis of the UC bank business model towards consumer loans at the expense of production lending exhibits the entrenchment of structural inflation, which puts more money on consumption while diminishing exposure in production. The record contribution of consumers--excludes consumer real estate exposure.  (Figure 5, lowest graph)

 

In short, the bank's latest business model indicates "too much money chasing too few goods!"

 

Funny and ironically, the mainstream keeps touting a (supply side) problem brought about by the BSP's policies. 

 

VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs

 

But there's more.  

Figure 6

 

It's no coincidence that the rebound in February inflation has coincided with the historic growth in December's government's deficit spending, with a time lag.  (Figure 6, topmost image)

 

Not just record public debt, but the bank's NCoG (net claims on the central government)—though slightly down (-2.6%) MoM last January—continued to post a double-digit growth rate (15.9%).  In pesos, bank NGoC remains adrift at historic levels!  (Figure 6, middle pane)

 

So, banks continue to monetize the colossal buildup of public debt!

 

Essentially, consumer credit subsidies and bank (and non-bank financials) monetization represent a backdoor loosening of the nation's financial conditions, which permits the BSP to remain "hawkish."

 

In any case, consumer and government consumption deepens the nation's dependence on external trade and financing, which galvanizes the credit-financed misallocations from the "twin deficits."

 

By implementing aggressive experimental liquidity policies, the technocracy continues to gamble with the economy.

 

At the end of the day, extensive balance sheet leveraging by consumers has started to "spill over" as Non-Performing Loans (NPLs) in Q4 2023, even as the employment rate reached an all-time high last December! (Figure 6, lowest graph)

 

Should the government use its fiscal "stabilizing" tool to reflate the deflationary impulse from a resurgence of bank NPLs, expect the worsening of the balance sheet health of banks, the government, and the economy, "stagflation" would be its likely outcome.

 

____

References

 

Ludwig von Mises, 6. Economics and the Citizen, Human Action, 1998, p.875. Mises Institute

 

Frank Shostak, Inflation Is Not Price Increases. Inflation Causes Price Increases. Mises.org, November 11, 2022

 

S&P Global, Sustained growth across the Filipino manufacturing sector in February S&P Global Philippines Manufacturing PMI, March 1, 2024