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

 

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

In this issue

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

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

II. Why Then the Surprise?

III. The Echo Chamber: Forecasting as Optimism Theater

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

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

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

VII. So What Happened to Q3 GDP?

VIII. Household Per Capita: The Downtrend

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

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

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

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

XIII. Increasing Influence of Public Spending in the Economy

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

XV. Statistical Mirage: Base Effects and the GDP Deflator

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

XVII. Overstating GDP via Understating the CPI

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

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

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

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

XXII. More Easing? The Rate-Cut Expectations Game

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

XXIV. Conclusion: Crisis as the Only Reform 

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

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

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

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

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

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

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

II. Why Then the Surprise? 

Forecasting errors were not only widespread—they were flagrant. 

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

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

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

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

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

Why such a brazen forecasting error? 

III. The Echo Chamber: Forecasting as Optimism Theater 

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

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

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

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

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

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

Statistics is NOT economics. 

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

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

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

Figure 1 

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

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

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

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

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

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

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

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

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

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

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

Figure 2

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

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

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

VII. So What Happened to Q3 GDP? 

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

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

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

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

VIII. Household Per Capita: The Downtrend 

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

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

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

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

Q3 2025 (4% GDP):

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

Q2 2025 (5.5% GDP): 

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

Q3 2024 (5.2% GDP): 

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

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

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

Figure 3

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

But buried beneath the headline, private construction was strong:

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

These robust figures cushioned the damage from the government crash.

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

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

As we already noted last September: (bold original) 

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

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

The Q3 data has now validated this. 

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

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

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

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

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

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

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

Political power is, at its core, about monopoly. 

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

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

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

Poverty becomes leverage. 

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

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

XIII. Increasing Influence of Public Spending in the Economy 

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

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

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

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

Yet even with statistical concealment, the entropy is visible. 

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

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

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

Figure 4 

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

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

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

XV. Statistical Mirage: Base Effects and the GDP Deflator 

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

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

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

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

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

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

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

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

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

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

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

XVII. Overstating GDP via Understating the CPI 

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

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

Figure 5

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

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

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

A lower deflator raises the computed real GDP. 

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

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

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

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

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

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

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

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

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

Meanwhile, official GDP prints show:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The administration has relied on this same narrative today. 

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

But their political and bureaucratic timing proved useful. 

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

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

This one-year window: 

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

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

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

XXII. More Easing? The Rate-Cut Expectations Game 

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

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

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

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

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

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

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

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

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

Figure 6 

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

XXIV. Conclusion: Crisis as the Only Reform 

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

But history gives us a blueprint: 

economic strains → political tensions → revolution/reforms

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

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

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

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

A crisis, not politics, will force change. 

To repeat our conclusion last October, 

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

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

____

References

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

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

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

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

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

  

The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

  

Like all bubbles, it ends when the money runs out—Andy Kessler

 

In this issue:

 

The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

I. Top 5 Property Developers: Remarkable Headline Performance in 2023

II. 2023 Top 5 Property Developers:  Beneath the Headlines, Soaring Debt, Interest Expense and Decaying Liquidity

III. Big Boys’ Club: Q4 2023’s Incredible Spike in Real Estate Sales!

IV. The Real Estate Sector’s Predicament: More Signs of Escalating Concentration and Other Risks

V. Slowing Consumers, Rising Risks of a Material Slowdown in Rental Revenues

VI. Rising Imbalances from Credit-Funded Real Estate Demand Amidst Rising Debt-Financed Supply

VII. How Inflation Benefited the Top 5 Developers and Why this is Unsustainable

VIII. The BSP’s Path Dependence: The Rescuing of Banks and the Property Sector

 

The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

 

The Philippines' top 5 real estate developers showed an impressive headline performance in 2023 and Q4. Beyond that, there are rising risks from multiple fronts.

 

I. Top 5 Property Developers: Remarkable Headline Performance in 2023

 

Here's a summary of the aggregate financial performance of the top 5 PSE-listed property developers—or the 'Big Boys Club' (BBC)—in 2023. The firms included are SM Prime Holdings [PSE: SMPH], Ayala Land [PSE: ALI], Megaworld [PSE: MEG], Robinsons Land [PSE: RLC] and Vista Land & Lifescape [PSE: VLL].

 

The headlines looked great!

Figure 1

 

First. Despite a 15.4% increase to Php 422.7 billion, revenues remained lower than the 2019 record of Php 431.2 billion. (Figure 1 topmost pane)

 

Moreover, the pace of growth moderated from 19.9% in 2022 to 15.4% last year. SM Prime led the pack with a 21.09% growth rate, while RLC's 7.7% contraction pulled revenues lower.

 

Second.  Real estate (RE) sales surged from 7.8% to 11.03% in 2023, driven by ALI and VLL's growth of 20.44% and 19.07%, respectively. It's important to note that ALI's RE sales included rental revenues. However, RE sales in pesos remained 12.8% below the 2019 peak. (Figure 1, second to the highest image)

 

But here’s the thing: since peaking in 2021, the share of RE revenues to the total plummeted to its lowest level in 2023, indicating that the bulk of the BBC’s revenues emanate from rent. (Figure 1, second to the lowest graph)

 

Third. While rental revenues represented the core, growth slowed from 51.5% to 20.7%.   In pesos, rental revenues in 2023 reached an all-time high of Php 157.6 billion, surpassing the previous milestone of Php 133.43 billion set in 2019. (Figure 1, lowest chart)

Figure 2

 

Fourth. Net income reached a record of Php 112.9 billion, marking a brisk increase of 29.6% or a net gain of Php 25.8 billion. This marks the second consecutive year of 29% growth in 2023. VLL and SMPH posted the fastest growth, with increases of 39.2% and 32.92%, respectively. (Figure 2, topmost visual)

 

II. 2023 Top 5 Property Developers:  Beneath the Headlines, Soaring Debt, Interest Expense and Decaying Liquidity

 

Fifth.  The cumulative debt level surged to a record Php 950.5 billion, marking a 5.8% increase and reaching back-to-back record highs in pesos. (Figure 2, second to the highest window)

 

While the pace of increase was slower than income or revenue growth, it still grew by Php 52.31 billion, more than DOUBLE the income growth.

 

Ayala Land and SMPH, the two largest developers, saw the most significant peso gains of Php 22.215 billion and Php 14.3 billion, respectively.

 

Sixth. High-debt loans and elevated interest rates pushed financing costs higher. Interest expenses surged by 14.6%—the second-highest growth rate since 2018—to a historic Php 5.121 billion in 2023, representing the highest-level share of revenues at 1.21%. (Figure 2, second to the lowest graph)

 

Seventh and last.

 

The cash reserves of the Big Boys Club fell for a second consecutive year to their lowest level since 2018, dwindling to Php 90.4 billion. This represents the lowest level in the context of cash-to-debt and cash-to-interest payments since 2018. (Figure 2, lowest image)

 

With record net income and debt increases, why the plunge in the BBC’s liquidity conditions?

 

Are these companies overstating the headlines or understating the delinquencies?

 

That's the unseen segment behind the good news.

 

III. Big Boys’ Club: Q4 2023’s Incredible Spike in Real Estate Sales!

 

More to the point.

 

Another perspective is the performance on a quarterly basis. After all, the annual report signifies an accumulation of the four quarters. From here, we observe changes that led to the annual outcome.

 

Surprisingly, after slightly picking up in Q2 and Q3 compared to last year and Q1's slack, real estate sales spiked in Q4, both in peso (Php 78.8 billion) and in percentage (25.8% YoY).

 

However, it's important to note that ALI includes rent in its real estate revenues.

Figure 3

The record surge in RE sales (in pesos) powered total revenue growth (20.3% YoY) to a fresh record of Php 126.4 billion. (Figure 3, topmost chart)

 

Stunningly, the Q4 spike elevated the sales level of the Big Boys' Club, resulting in its higher share of Q4 (nominal) NGDP. (Figure 3, second to the highest image)

 

IV. The Real Estate Sector’s Predicament: More Signs of Escalating Concentration and Other Risks

 

Alternatively, if the Real Estate GDP estimates are accurate, the BBC accounted for 35.35%, which means that even with numerous competitors, the group continues to corner a larger share of the industry!  Talk about the Big Boys getting Bigger! (Figure 3, second to the lowest diagram)

 

The Real Estate NGDP and Real Estate revenues seem to have parted in direction in Q4.  (Figure 3, second to the lowest window)

 

With the spike in RE revenue growth and a 35% share, it's curious that the industry reported only an 8.7% growth rate (NGDP)—which likely indicates that the rest of the playing field experienced significantly below-average growth in Q4!

 

Or, has the BBCs cannibalized the markets of their lesser competitors, including the SMEs?

 

Importantly, it reveals the industry’s mounting concentration risks.

Figure 4

After all, the sector's declining contribution to real GDP, coupled with its increasing share of the bank lending portfolio, is symptomatic of credit-fueled overspending or malinvestments. (Figure 4, topmost chart)

 

Rising vacancies are just another sign of imbalances or supply-demand disorder.

 

Furthermore, given that the growth of the BSP’s real estate index materially slowed in Q4, this likely indicates a slowdown in speculative activities in the secondary markets, with the same activities shifting towards sales via the primary markets (property acquisition via developers). (Figure 4, middle picture)

 

It is important to point out too that the property sector and banks are closely intertwined or "joined at the hip." The property sector accounted for a significant share of Universal Commercial Bank loans: 23.8% of production loans, 21.1% of net RRPs loans, and 20.4% of gross RRPs loans. (Figure 4, lowest diagram)

 

That is to say, the industry’s decaying liquidity conditions and overreliance on leveraging to generate revenue and income growth are also manifestations of accruing imbalances.

 

V. Slowing Consumers, Rising Risks of a Material Slowdown in Rental Revenues

 

There’s more.

 

Risks are rising even in the industry’s core revenues: rental operations.

Figure 5

 

The decelerating cumulative revenue growth of listed non-construction retailers (SM Retail, Puregold, Robinsons Retail, SSI Group, Philippine Seven, and Metro Retail) mirrors the moderating growth of the BBC's rental revenues. (Figure 5, topmost window)

 

Since reaching its peak of 28.6% in Q2 2022—attributed to the BSP’s unprecedented injections and the ‘reopening’—year-over-year growth has steadily declined. The aggregate sales growth of the retail titans slowed further from 8.27% to 8.23% in Q4. (Figure 5, middle image)

 

Following the money trail, the slowing universal commercial bank credit growth rate has aligned with the BBC’s rent revenue growth. Credit growth has been indicative of the demand for rents.

 

By inference, rising rates would eventually exert pressure on rental revenues as vacancies increase due to retailers' faltering viability.

 

In short, misled by false monetary signals, retail entrepreneurs rush in to capitalize on the highly anticipated boom in consumer spending, even as the latter’s spending capacity is being eroded by inflation, the crowding-out effects of deficit spending, and malinvestments.

 

Such increasing divergence should amplify the exposure of malinvestments as unviable ventures.

 

VI. Rising Imbalances from Credit-Funded Real Estate Demand Amidst Rising Debt-Financed Supply

 

It's not just rent, but also the demand for real estate that has been anchored by bank credit expansion.

 

Therefore, it's unsurprising to see real estate (RE) revenues boosted by an upswing in the bank's consumer real estate credit growth.

 

The banking system’s real estate consumer loans grew by 7% in Q4 2024. However, its 38.4% share of consumer loans signifies the lowest since March 2020, as credit cards and salary loans have outperformed. (Figure 5, lowest diagram)

 

By the same token, unless productivity defines the character of the economy's development, the increasing credit-funded bets on the property sector would prove unsustainable.

 

Rising supply in the face of leveraged demand further magnifies its various financial and economic risks.

 

VII. How Inflation Benefited the Top 5 Developers and Why this is Unsustainable

 

That's not all.

Figure 6

 

The era of inflation has benefited property firms. Profit margins rose alongside the core CPI. Expanded profit margins have contributed immensely to the so-called 'bottom line,' supported by bank credit growth. (Figure 6, topmost and middle charts)

 

The fact of the matter is that the industry breathes in leverage, which drives the industry’s survival and expansion while providing less and less economic value added. (Figure 6, lowest graph)

 

The fiat money-based financial system requires ascending property prices to increase collateral values that buttress credit expansion. Therefore, policies have always been geared towards this process.

 

Unfortunately, diminishing returns plague the artificial boom from inflationism—where rising rates in response to inflation, malinvestments, and falling savings offset easy money policies.

 

VIII. The BSP’s Path Dependence: The Rescuing of Banks and the Property Sector

 

Ultimately, despite elevated inflation, the BSP will likely resort to its 'path dependence' of implementing an easy money regime when confronted with economic and financial risks.

 

It will likely deliver the 2020 bailout template, incorporating a mix of monetary policy rate cuts, direct and indirect liquidity injections (via financials), and revive, extend, and expand capital, regulatory, and operational relief measures.

 

On the other hand, political authorities will ramp up their fiscal tools, 'stabilizers,' where the political justification to increase defense spending will likely play a critical role in the coming series of 'stimulus.'

 

Deficit spending to GDP will hit new milestones.

 

The vent for all the series of political rescues of the elites will be vented on the exchange rate: the USD Peso.

 

Figure 7

 

Lastly, the recent market rout stock market rout has been led by the shares of the BBC.  

If anything, the recent downshift in their share prices reinforces a massive "rounding top." (Figure 7)

 

Have share prices of the Big Boys' Club been showing the way?