Today the fashionable philosophy of Statolatry has obfuscated the issue. The political conflicts are no longer seen as struggles between groups of men. They are considered a war between two principles, the good and the bad. The good is embodied in the great god State, the materialization of the eternal idea of morality, and the bad in the "rugged individualism" of selfish men. In this antagonism the State is always right and the individual always wrong. The State is the representative of the commonweal, of justice, civilization, and superior wisdom. The individual is a poor wretch, a vicious fool—Ludwig von Mises
In this issue
The Philippine Flood
Control Scandal: Systemic Failure and Central Bank Complicity
I. ‘Shocked’ or Complicit?
The Nexus of Policy and Corruption
II. A Financial System in
Cartel’s Grip
III. Structural Failure,
Not Just Regulatory Lapse; Virtue-Signaling Over Solution
IV. BSP Withdrawal Caps as
Capital Controls: Six Dangers
V. Liquidity Theater and
the Politics of Survival
VI. Systemic Risks on the
Horizon
VII. Political Survival
via Institutional Sacrifice; The
Kabuki Commission
VIII. The Political
Playbook: Delay, Distract, Dissolve
IX. Historical Parallels:
When Economics Ignite Revolutions
X. The Strawman of Fiscal
Stability and Revenue Realities
XI. Expenditure
Retrenchment and the Infrastructure Dependency Trap
XII. The Keynesian
Paradox, Liquidity Trap and Deposit Flight
XIII. PSE’s Sleight of
Hand on CMEPA
X. The Horizon Has Arrived
XI. Statolatry and the Endgame
The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity
I. ‘Shocked’ or Complicit? The Nexus of Policy and Corruption
Media reported that BSP was “shocked” by the scale of corruption. The Philstar quoted the BSP Chief, who also chairs the AMLC: “It was worse than we thought… We knew there was corruption all along, but not on this scale… as much of a shock to the central bank as to the public.”
“Shocked” at the
scale of corruption? Or at their own complicity?
Figure 1
Easy-money ‘trickle-down’ policies didn’t just enable anomalies—they fostered and accommodated them. Banks, under BSP’s watch, have financed the government’s ever-expanding debt-financed deficit spending binge—including flood control projects—through net claims on central government (NCoCG), which hit Php 5.547 trillion last July, the third highest on record. Public debt slipped from July’s record high to Php 17.468 trillion in August. (Figure 1, upper window)
II. A Financial System in Cartel’s Grip
Meanwhile, operating like a cartel, bank control of the financial system has surged to a staggering 82.7% of total financial resources/assets, with universal commercial banks alone commanding 77.1% (as of July 2025). (Figure 1, lower chart)
This mounting concentration is no mere market feature—the scandal exposes the financial system’s structural vulnerability. The scale of transactions, personalities, and institutional fingerprints involved in the scandal was never invisible. It was ignored.
III. Structural Failure, Not Just Regulatory Lapse; Virtue-Signaling Over Solution
This isn’t just a regulatory lapse.
It is structural, systemic, and political—failure implicating not only the heads of finance and monetary agencies, but extends up to political leadership past and present. The iceberg runs deep.
Worse, the economy’s deepening dependence on deficit spending to prop up the GDP kabuki only enshrines the “gaming” of the system—a choreography sustained by a network of national and local politicians, bureaucrats, financiers, media, and their cronies.
Corruption scandals of this kind are therefore not confined to infrastructure—it permeates every domain tethered to policy-driven redistribution
Yet instead of accountability, the BSP hides behind virtue-signaling optics. It flaunts probes and caps withdrawals, likely oblivious to the systemic damage it may inflict on beleaguered banks, stained liquidity, and an already fragile economy.
The predictable ramifications: lingering uncertainties lead to a potential tightening of credit, and erodes confidence in Philippine assets and the peso.
Ironically, this impulse response risks amplifying the very imbalances the BSP aims to contain—Wile E. Coyote dynamics in motion.
Banks attempt to camouflage record NPLs via ‘denominator effects’ from a growth sprint on credit expansion while simultaneously scrambling to mask asset losses via intensifying exposure to Available for Sale Securities (AFS)—a desperate sprint toward the cliff’s edge—as previously discussed. (see reference section for previous discussion)
IV. BSP Withdrawal Caps as Capital Controls: Six Dangers
As part of its histrionics to contain the flood-control scandal, the BSP imposed a daily withdrawal cap of Php 500,000.
First, these sweeping limits target an errant minority while penalizing the wider economy. Payroll financing for firms with dozens of employees, capital expenditures, and cash-intensive investments and many more aspects of commerce all depend on such flows. The economy bears the cost of institutional failure.
Second, withdrawal caps are a form of capital control—another step in the state’s creeping centralization of the economy. Price controls (MSRP and "20 rice" rollouts), wage controls (minimum wages), and exchange-rate controls (the USDPHP soft peg) are already in place. Capital controls, by nature, bleed into trade restrictions and signal deeper interventionist intent.
Third, with strains in the banking system worsening, the caps effectively lock in liquidity—an indirect rescue effort for banks at the expense of depositors. This is moral hazard in action: prudence is punished while recklessness is protected. But locking liquidity in stressed institutions risks triggering a velocity collapse, where money exists but refuses to circulate—amplifying systemic fragility.
Fourth, once the public realizes that siloed money can be unilaterally withheld at will, the credibility of financial inclusion erodes, risking a collapse in confidence. Combined with CMEPA’s assault on savings, these measures push households and firms toward informal channels, further eroding trust in the banking system itself. The behavioral signal is chilling: your money is conditional; your trust is optional.
Fifth, such public assurance measures expose the banking system’s inherent weakness. Rather than calming markets, they sow doubt over BSP’s capacity to safeguard stability—risking a surge in cash hoarding outside the formal system and spur credit tightening.
Sixth, international investors may interpret this as mission creep in financial repression—adding pressure on Philippine risk premiums and the peso. Capital flight doesn’t need a headline—it just needs a signal.
Finally, history warns us: Argentina’s 2001 corralito, Greece in 2015, and Lebanon in 2019 all saw withdrawal limits destroy trust in banks for a generation. The Philippines now flirts with the same danger.
What begins as optics may end as rupture.
Efforts to win public approval by “doing something” haven’t stopped at withdrawal caps or capital controls. The BSP has widened its response to include probes into the industry’s legal, administrative, and compliance frameworks—an escalation designed more for optics than systemic repair.
While the BSP chief admitted that freezing bank funds tied to the flood control scandal could affect liquidity, he downplayed broader risks, claiming: “Our banks are very, very liquid at this point... No bank runs.” (italics added)
Figure 2
But BSP’s own metrics tell a different story (as of July 2025): (Figure 2, topmost graph)
-Cash-to-deposit
ratio is at all-time lows
-Liquidity-to-deposit ratio has fallen to 2020 levels
This isn’t stability—it’s strain.
VI. Systemic Risks on the Horizon
Beyond tighter liquidity and credit conditions, several systemic risks loom:
1) Funding Stigma: Banks under investigation face counterparty distrust. Interbank markets may shrink access or charge higher spreads, amplifying liquidity stress.
2) Reputational Contagion: Even unaffected banks risk depositor anxiety, particularly if they share infrastructure or counterparties with implicated institutions. Concentration risk thus becomes contagion risk.
3) Depositor Anxiety: The public often interprets targeted probes as systemic signals. Precautionary withdrawals may accelerate, caps notwithstanding. Was BSP anticipating this when it chopped RRR rates last March and doubled deposit insurance?
4) Regulatory Overreach: To signal credibility, BSP may impose stricter KYC/AML protocols—slowing onboarding, increasing balance sheet friction, and chilling transaction flows.
5) Market Pricing of Risk: Equity prices, bond spreads, interbank rates, and FX volatility may rise—exposing incumbent fragilities and financial skeletons in the closet. Philippine assets have been the worst performers per BBG. (Figure 2, middle image)
6) Earnings Pressure and Capital Hit: Sanctions, fines, and reputational damage translate to earnings erosion and capital buffer depletion—weakening the very liquidity BSP claims is “ample.”
7) AML Fallout: The probe exposes systemic AML blind spots, risking FATF graylisting. Compliance costs may rise, deterring foreign capital. This episode reveals how the statistical criteria behind AMLA and credit ratings are fundamentally flawed.
8) Political Pressure: The scandal’s reach into lawmakers and officials may trigger clampdowns on regulators, budget delays, and a slowdown in infrastructure spending.
VII. Political Survival via Institutional Sacrifice; The Kabuki Commission
One thing is clear: Diversionary policies—from the war on drugs to POGO crackdowns to nationalism via territorial disputes—have boomeranged. Now, the political war is being waged on governing institutions themselves.
The BSP’s trifecta—capital controls, signaling channels, and probes—is part of a tactical framework to defend the administration’s survival. It sanitizes executive involvement while letting the hammer fall on a few “fall guys.” This is textbook social democratic conflict resolution: high-profile investigations and figurehead resignations to appease public clamor.
Case in point: the Independent Commission for Infrastructure (ICI), reportedly funded by the Office of the President. How “independent” can it be if the OP bankrolls and decides on its output?
As I noted on X: (Figure 2, lowest picture)
“That’s like asking the bartender to audit his own till. This ‘commission’ smells more like kabuki.”
After a week, an ICI member linked to the scandal’s villain resigned.
VIII. The Political Playbook: Delay, Distract, Dissolve
Authorities hope
for three things:
-That time will
dull public anger
-That the probe’s outcome satisfies public appetite
-That new controversies bury the scandal
But history warns us: corruption follows a Whac-a-Mole dynamic—until it hits a tipping point.
IX. Historical Parallels: When Economics Ignite Revolutions
Two EDSA uprisings were preceded by financial-economic upheavals:
1983 Philippine debt crisis → 1986 EDSA I
1997 Asian crisis → 2000 EDSA II
The lesson is stark: Economic distress breeds political crisis. Or vice versa.
X. The Strawman of Fiscal Stability and Revenue Realities
The fiscal health of the Philippine government has been splattered with piecemeal evidence of the flood control scandal’s impact on the political economy.
Authorities may headline that “Tax Revenues Sustain Growth; Budget Deficit Well-Managed and On Track with Full-Year Target”—but this is a strawman, built on selective perception masking structural deterioration.
In reality, August 2025 revenues
fell -8.8%. The Bureau of Internal Revenue’s (BIR) growth slowed to 5.04%,
barely above July’s 4.8%, and far below 11.5% in August 2024. Bureau of Customs
(BoC) collections slipped from +6% in July to -1.4% in August, versus +4.7% a
year ago. Non-tax revenues collapsed -67.8%, deepening from July’s -9.7%, in
stark contrast to the +281.6% surge a year earlier.
Figure 3
For January–August, revenue growth has decelerated sharply from 15.9% in 2024 to just 3.1% in 2025. BIR collections slowed to 11.44% (from 12.6%) and BoC to 1.14% (from 5.67%). Non-tax revenues plunged -31.41%, against +58.9% a year earlier. (Figure 3, topmost diagram)
XI. Expenditure Retrenchment and the Infrastructure Dependency Trap
Meanwhile, August expenditures fell -0.74% YoY, with National Government disbursement contracting 11.8% for the second straight month. It shrank by 11.4% in July.
Eight-month expenditures slowed from 11.32% in 2024 to 7.15% in 2025, driven by a sharp decline in NG spending from 10.6% to 3.98%. (Figure 3, middle and lowest graphs)
Infrastructure spending dropped 25% in July, per BusinessWorld. The deeper August slump reflects political pressure restraining disbursements—pulling down the eight-month deficit.
Though nominal revenues and expenditures hit record highs, the 2025 eight-month deficit of Php 784 billion is the second widest since the pandemic-era Php 837.25 billion in 2021 Ironically, today’s deficit remains at pandemic-recession levels even without a recession—yet.
As we noted back in early September:
"The unfolding DPWH scandal threatens more than reputational damage—it risks triggering a contractionary spiral that could expose the fragility of the Philippine top-down heavy economic development model.
"With Php 1.033 trillion allotted to DPWH alone (16.3% of the 2025 budget)—which was lowered to Php 900 billion (14.2% of total budget)—and Php 1.507 trillion for infrastructure overall (23.8% and estimated 5.2% of the GDP), any slowdown in disbursements could reverberate across sectors.
"Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity.
"Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. "
And it’s not just infrastructure. Political pressure has spread to cash aid distribution. ABS-CBN reported that DSWD is preparing rules “to insulate social protection programs from political influence.” Good luck with that.
For now, rising political pressure points to a drastic slowdown in spending.
XII. The Keynesian
Paradox, Liquidity Trap and Deposit Flight
Figure 4
Remember: the government’s share of national GDP hit an all-time high of 16.7% in 1H 2025. (Figure 4, upper chart)
This excludes government construction GDP and private sector participation in political projects (PPPs, suppliers, contractors etc.). Yet instead of a Keynesian multiplier, higher government spending has yielded slower GDP—thanks to malinvestments from the crowding out dynamic.
The BSP is already floating further policy easing this October. BusinessWorld quotes the BSP Chief: “If we see [economic] output slowing down because of the lack of demand, then we would step in, easing policy rates [to] strengthen demand.”
The irony is stark. What can rate cuts achieve in “spurring demand” when the BSP is simultaneously probing banks and imposing withdrawal caps?
And more: what can they do when authorities themselves admit that CMEPA triggered a “dramatic” 95-percent drop in long-term deposits, or when households are hoarding liquidity in response to new tax rules—feeding banks’ liquidity trap?
XIII. PSE’s Sleight of Hand on CMEPA
Meanwhile, the PSE pulled a rabbit from the hat, claiming CMEPA attracted foreign investors from July to September 23. As I posted on X.com: The PSE cherry-picks its data. PSEi is significantly down, volume is sliding. The foreign flows came from a one-day, huge cross (negotiated) sale from Metrobank (PSE:MBT) and/or RL Commercial (PSE: RCR)—untruth does not a bull market make.” (Figure 4, lower picture)
What this really signals is that banks will scale up borrowing from the public to patch widening balance sheet imbalances—our Wile E. Coyote moment (see reference to our previous discussion). Banks, not the public, stand to benefit.
IX. The Debt Spiral Tightens
The bigger issue behind policy easing is government financing.
As we’ve
repeatedly said, the recent slowdown in debt servicing may stem from: “Scheduling
choices or prepayments in 2024—or political aversion to public backlash—may
explain the recent lull in debt servicing. But the record and growing deficit
ensures borrowing and servicing will keep rising.” (see reference)
Figure 5
August 2025 proved the point: Php 601.6 billion in amortization pushed eight-month debt service to Php 1.54 trillion—just shy of last year’s Php 1.55 trillion, and already near the full-year 2023 total (Php 1.572 trillion). (Figure 5, topmost and middle graphs)
Foreign debt servicing’s share rose from 19.86% to 22.3%.
Eight-month interest payments hit a record Php 584 billion, raising their share of expenditures from 13.8% to 14.8%—the highest since 2009. (Figure 5, lowest chart)
All this confirms: BSP’s rate cuts serve the government, banks, and politically connected elite—not the public. (see reference)
As we noted last August: (See reference)
-More debt → more servicing → less for everything else
-Crowding out hits both public and private spending
-Revenue gains won’t keep up with servicing
-Inflation and peso depreciation risks climb
-Higher taxes are on the horizon
That horizon is here. Higher debt, more servicing, more crowding out, faltering revenue gains, and higher taxes in motion (new digital taxes, DOH’s push for sin tax expansion…).
Inflation and peso depreciation are coming.
XI. Statolatry and the Endgame
The paradox is sobering: Reduced public spending may slow diversion from wealth consumption and unproductive activities to a gradual build-up in savings—offering a brief window for capital formation.
The bad news? Most still believe political angels exist, and that governance can only be solved through statism—a cult which the great economist Ludwig von Mises called statolatry.
For the historic imbalances this ideology has built, the endgame can only be crisis.
____
References
Banks and Fiscal Issues
Prudent Investor Newsletters, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025
Prudent Investor Newsletters, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 7, 2025
Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025
Prudent Investor Newsletters, The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?, Substack, July 7, 2025
Prudent Investor Newsletters, Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning, Substack, August 31, 2025
CMEPA
Prudent Investor Newsletters, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback July 27, 2025 (substack)
Prudent Investor Newsletters, The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design July 20,2025 (substack)
Ludwig von Mises, Bureaucracy, NEW HAVEN YALE
UNIVERSITY PRESS 1944. p.74 Mises.org
