The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels

 

You can't do well in investments unless you think independently. And the truth is, you're neither right nor wrong because people agree with you. You're right because your facts and your reasoning are right. In the end, that's all that counts. And there wasn't any question about the facts or reasoning being correct—Warren Buffett 

In this issue: 

The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels

I. Ghost Month, Real Losses

II. The ICTSI Fulcrum Cracks

III. Breadth Confirms the Divergence

IV. From Prop to Drag: The Mechanics of Concentration in Reverse

V. Rotation Without Broadening: Speculative Capital in Search of the Next Punt

VI. The Arrière-Pensée: Confidence Is the Cover Story, Collateral Is the Point

VII. Conclusion: Benchmark-ism Meets Its Own Arithmetic 

The PSEi-ICTSI Show, Part III: The Fulcrum Cracks—Benchmark-ism Unravels 

When one stock becomes the market, its reversal becomes the market's problem: August exposes the concentration, liquidity, and benchmark-ism beneath the PSEi's manufactured confidence 

In Part I we flagged ICTSI as the PSEi 30's single point of vulnerability. In Part II we showed how that vulnerability had metastasized into concentrated liquidity, shrinking participation, and outright benchmark-ism. August supplied the arithmetic Part II warned was coming. 

I. Ghost Month, Real Losses

Figure 1

August is conventionally excused as the market's "ghost month"—a superstition with Chinese roots, ironically applied by the establishment commentaries to a market that isn't Chinese. The historical record hardly justifies the fear: from 2010 through 2025, August produced gains in only six of sixteen years, with an average loss of a marginal -0.33%. Mostly noise. (Figure 1, upper window)  

This August wasn't noise. The PSEi 30 fell 4.49% month-on-month—the fourth-largest monthly loss since 2010—dragging the year-to-date return to roughly -1.60% and the year-on-year figure to -3.24%. (Figure 1, lower table)

Figure 2 

The damage was compressed: a single closing week's 4.52% plunge erased three months of the index's ICTSI-driven advance. (Figure 2, upper image) 

Ghost month or not, the mechanism behind the reversal is the one this series has tracked for some time, but which intensified last June: ICTSI had become the fulcrum propping up the PSEi 30, and a fulcrum that lifts a benchmark on the way up can just as easily accelerate its fall. 

The timing again matters. 

The final week's plunge did not arrive in isolation. 

On Friday, the USDPHP closed at Php 62.265, a record, extending Thursday's prior record-low close of Php 61.888. Markets were also absorbing the BSP's latest policy signals, and the 7-month record fiscal and trade deficits. (Figure 2, lower chart) 

The PSEi 30 fell in lockstep, down for a fourth consecutive session and closing below 6,000, erasing gains since June. 

A rate hike aimed at defending the currency and a benchmark sliding on the same day are not coincidences to be filed separately from the ICTSI story. They are another expression of the same "resistance to adjustment" pattern this (stagflation) series has tracked across fiscal, monetary, and FX-regime policy: administrative efforts to keep the peso, the yield curve, and the index from clearing at levels the underlying imbalances would otherwise dictate. 

When that resistance gives way on the currency side, it rarely leaves the equity side untouched—not when equity "confidence" was doing double duty as collateral support in the first place. 

II. The ICTSI Fulcrum Cracks 

The same stock that manufactured the June-July rally supplied most of August's decline. ICTSI fell 7.86% week-on-week and 8.1% month-on-month, accounting for roughly 46% and 48%, respectively, of the PSEi's weekly and monthly losses. 

This is simply capitalization-weighting running in reverse. The identical arithmetic that let one company's 57% first-half return mask a negative-6.8% average constituent return in Part II is now transmitting one company's reversal directly into the headline index. 

A benchmark built to amplify a single stock's ascent is, by the same construction, built to amplify its descent.

Figure 3

ICTSI's share of the PSEi's free-float market cap slipped to 25.58% by month's end, down from a peak of 27.37% in the first week of August. (Figure 3, upper pane)         

The combined weight of the top five constituents eased from July's peak of 56.12% to about 54.7%. 

Small retreats in percentage terms—large in what they signal: the "national team" support that Part II documented in the daily trading choreography appears to be losing its grip on the tape. 

III. Breadth Confirms the Divergence 

Beneath the headline, the market's breadth told a different story from the index. 

Only 10 of the PSEi's 30 constituents rose in August; the average constituent decline was roughly -2.92%—materially less than the benchmark's -4.49%, as ICTSI's outsized free-float market-cap weight amplified its decline in the headline index. (Figure 3, lower visual)

Figure 4

The divergence was even more pronounced during the final week's meltdown: only 7 of the 23 constituents that traded that week rose, while the average change was -2.78%—another example of how free-float market-cap weighting magnified the impact of ICTSI's decline on the benchmark. (Figure 4, upper diagram) 

Exchange-wide breadth stayed only marginally negative—1,783 advances against 1,818 declines—a spread nowhere near as lopsided as the ICTSI-driven index move would suggest. (Figure 4, lower image) 

That gap between a nearly even advance-decline line and a sharply negative benchmark is itself the tell: the index and the market it purports to summarize are increasingly telling two different stories, exactly as Part II's mid-year data showed in reverse. 

IV. From Prop to Drag: The Mechanics of Concentration in Reverse

Figure 5 

The unraveling wasn't confined to price. It showed up in the plumbing of trading activity too. ICTSI's % share of Main Board volume fell sharply from 28.23% in July to 21.91% in August as foreign flows shifted from net buying (Php 5.265B in July) to net selling (Php 1.59B in August). (Figure 5, upper graph) 

The same expansion in ICTSI's trading dominance that Part II attributed to both rising ICTSI activity and shrinking activity elsewhere is now reversing on both counts at once: as ICTSI volume recedes, there is no offsetting pickup in the rest of the market to cushion the loss of liquidity. 

The pattern increasingly resembles South Korea's KOSPI, where Samsung and SK Hynix now function as the index in practice. The difference is that Korea's concentration rides a global AI-hardware cycle with real earnings behind it; ICTSI's had no comparable confirmation from global port-operator peers, a point already established in Part II. (Figure 5, lower chart) 

Main Board volume fell 17.24% year-on-year to about Php 113.108 billion; aggregate turnover fell 4.5% to Php 142.976 billion. Cross trades made up 18.74% of Main Board volume, a four-month high—more of the exchange's already-shrinking activity conducted off the central order book, away from open price discovery. 

V. Rotation Without Broadening: Speculative Capital in Search of the Next Punt 

As the dominant ICTSI trade weakened, the other big caps failed to fill the gap—or the expected ‘rotation’ didn’t happen. Instead, trading activity shifted toward smaller, more speculative names—restructuring rumors, backdoor-listing chatter, M&A gossip—even as overall volume contracted. 

Near-even breadth on falling volume is not a healthy broadening of participation. It looks more like speculative capital searching for the next short-term story once the previous market leader loses momentum, not new capital entering the market on improved fundamentals. 

The extraordinary ICTSI ascent that carried the PSEi through June and July appears to have reached its inflection point. What follows this kind of top is rarely a broad-based handoff to the rest of the index; it's usually a scramble among smaller, thinner names while the index itself searches for a new prop. 

The progression is telling: from speculation to outright gambling, as capital searches less for value than for the next trade capable of replacing the momentum it has lost—more recipe for capital consumption. 

VI. The Arrière-Pensée: Confidence Is the Cover Story, Collateral Is the Point 

In Part II, we named this dynamic “benchmark-ism”: political and institutional narrative management that uses market and economic statistics to manufacture the appearance of stability—or to keep the Overton window of acceptable economic outcomes from shifting toward adjustment. 

August is the moment that narrative met its own arithmetic. 

Gains have always been projected as "confidence"—a rising PSEi as evidence of "resilience," useful for a leadership with sagging approval ratings and an economy absorbing the mounting tensions from the aftershocks of the Iran-war oil shock, EO 110's price-suppression architecture, and a cascade of BSP relief measures already tracked in this series. But confidence was never the only objective, and arguably not the primary one. 

Elevated equity prices are collateral. They support asset values on bank and corporate balance sheets, cushioning a financial system already leaning on the BSP's regulatory relief and foreign-exchange interventions to keep the credit cycle turning. 

Put bluntly: a rising PSEi, and specifically a rising ICTSI, was never just about optics. It was about propping up the collateral base that a decaying credit cycle depends on to keep rolling over. That is the arrière-pensée behind the applause Part II described—the second, unstated motive sitting behind the first. 

The trouble with using one stock as collateral infrastructure for an entire financial system is that the mechanism is symmetric. 

What inflates the collateral on the way up can deplete it on the way down, potentially at a leveraged pace 

August didn't just cost the PSEi 4.49%. It cost the system a slice of the very collateral cushion the whole exercise was designed to build. 

VII. Conclusion: Benchmark-ism Meets Its Own Arithmetic 

This isn't the first time a single Philippine equity story has been mistaken for—or dressed up as—a market. The DigiPlus [PSE: PLUS] gaming-stock bubble of 2025 ran on the same logic: a policy-fueled speculative vehicle inflated past any relationship to its fundamentals, celebrated rather than examined, until the arithmetic of momentum reversed on its own. 

We called that top in real time and traced its roots back to the same boom-bust pattern that took down BW Resources in 1999. 

ICTSI is a larger, more systemically consequential version of the same mechanism—dressed in blue-chip legitimacy instead of casino-stock notoriety, but running on identical fuel: concentrated, momentum-driven flows mistaken for confidence. 

• Part I called ICTSI the PSEi's single point of vulnerability. 
• Part II showed that vulnerability metastasizing into concentrated liquidity and narrative management.
• Part III shows what happens when the fulcrum that was doing the lifting starts doing the dropping instead. 

The PSEi was supposed to represent the market. But once the representation itself becomes something to be managed—because it communicates confidence and supports financial conditions—it begins to substitute for the reality it was meant to represent. That is the simulacrum. 

The episode reconfirms why the PSEi is becoming an increasingly unreliable gauge of the broader Philippine equity market—and, equally, a more fragile one: susceptible to substantial mispricing, disproportionate liquidity exposure, asset-bubble formation, rising concentration risk, and hidden leverage. 

Benchmark-ism can manufacture confidence for a while. It cannot repeal the arithmetic of the index it's built on.

___

References:

Prudent Investor Newsletters, The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market, July 19,2026 

Prudent Investor Newsletters, PSEi 30: The ICTSI Show, June 7, 2026

 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

 

The reflexive interaction between the act of lending and collateral values has led me to postulate a pattern in which a period of gradual, slowly accelerating credit expansion is followed by a short period of credit contraction-the classic sequence of boom and bust. The bust is compressed in time because the attempt to liquidate loans causes a sudden implosion of collateral values—George Soros

In this issue: 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

I. The Liturgy of Consequentialism

II. How the PSEi Leadership Changed Hands

III. The PSEi 30s Volte-Face, Engineered

IV. Market Breadth Tells a Different Story

V. PSEi 30-ICTSI’s Liquidity-Gains Drive Volume

VI. July's “UMIC” Rally—and the Missing Confirmation

VII. When Daily Trading Patterns Become the Story

VIII. Concentration and Shrinking Market Participation

IX. Concentration Across the Financial System

X. Benchmark-ism: From Market Benchmark to Political Instrument

XI. Conclusion: The Applause Before the Inflection Point 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

Benchmark-ism, Concentrated Liquidity, and the Erosion of Price Discovery 

In Part I, we mapped how International Container Terminal Services, Inc. (ICTSI) had quietly become the Philippine Stock Exchange Index's (PSEi 30) single point of vulnerability — one company, ranked 16th by assets among the index's 30 constituents, dictating the benchmark's direction while breadth collapsed underneath it. Five weeks on, the show hasn't ended. It's gone to Broadway. 

I. The Liturgy of Consequentialism 

The Philippine Stock Exchange: 

"Port operator International Container Terminal Services, Inc. (ICT) closed at a record market capitalization of Php2.01 trillion on July 14, 2026, becoming the first domestic company to breach the Php2 trillion milestone in Philippine Stock Exchange history..." 

PSE President and CEO Ramon Monzon called the run-up — a doubling of market cap in under ten months — a reflection of "confidence in the leadership of ICT Chairman and President, Mr. Enrique K. Razon, Jr., and in the strategic direction of the company." 

The PSE didn't ask how Php1 trillion became Php 2 trillion in ten months. It didn't ask why one port operator's equity should double while the rest of the index bled or struggled. It simply certified the outcome and read confidence backward into it — consequentialism as institutional reflex: the end justifies, and explains, the means. 

The more fundamental questions—How did prices arrive here? What incentives produced these outcomes? Are these valuations products of decentralized market discovery or increasingly centralized intervention? —remain largely unasked. 

Echoing populist politics, the exchange eulogized the "confidence" embedded in serial bidding activity, as though price were self-authenticating. One has to wonder — if ICTSI reverses, will the PSE eulogize that too, or will the microphone quietly go elsewhere? 

Markets, however, are not merely scoreboards. Their principal economic function is to facilitate price discovery, the continuous process through which dispersed knowledge is aggregated into prices that guide capital allocation. When this process becomes impaired, rising prices cease to communicate genuine information and instead begin transmitting distorted signals throughout the economy. 

The issue is whether one company's extraordinary ascent has gradually transformed the Philippine equity market into something increasingly detached from its traditional role as a mechanism for economic calculation. 

II. How the PSEi Leadership Changed Hands

Figure 1

ICTSI assumed the PSEi's primary-driver role in August 2025, displacing SM Investments Corporation. (Figure 1, topmost window)   

Since the index's February 2026 peak, though, the PSEi 30 rapidly plunged to an interim low of 5,768 on June 1 — and that low did not arrive alone. 

It landed alongside a cluster of events that, viewed individually, might each be dismissed as coincidence, but taken together describe a single phenomenon: 

• Philippine treasury yields spiked to interim peaks across the curve as the peso fell to record lows — a quasi-meltdown in domestic financial markets. (Figure 1, middle graph) 
• EO 110, launched at the outset of the Iran war on March 24, and a cascade of BSP bank-relief measures rolled out from April through June. 
• Money supply (M3) posted a four-month (February–May), double-digit surge. (Figure 1, lowest image) 
• Manufacturing, employment, CPI, and fiscal statistics allbrightened in near-lockstep. 

But when multiple indicators across finance, banking, macroeconomics, and public statistics simultaneously reverse direction immediately following aggressive policy interventions, it becomes increasingly difficult to attribute the entire sequence to chance alone. 

Demonstrated preferences often reveal more than official rhetoric. 

Governments and central banks ultimately reveal their priorities not through speeches but through the policies they implement under pressure. 

III. The PSEi 30s Volte-Face, Engineered 

June delivered the reversal driven overwhelmingly by ICTSI—anchored by a single-day 6.14% PSEi spike on June 15. 

Figure 2

With the prior pace of record gains apparently not enough and with the broader market still insouciant, ICTSI's price advance had to intensify further to reverse the downtrend and foment upside momentum. And so it did. 

The timing mattered. 

ICTSI's acceleration coincided with the period during which policy easing, liquidity expansion, and official stabilization measures were simultaneously gathering force. Whether viewed as coincidence or interaction, the market's reversal cannot be understood by examining ICTSI's price action in isolation from its broader monetary and financial backdrop. 

The PSEi 30 rose 4.65% month-on-month in June, trimming its year-on-year deficit to -5.15% and its year-to-date loss to -0.26%, while lifting quarterly returns to 1.48%. (Figure 2, middle table) 

Financials—led by the top three banks—contributed. But the real engine was the services sector: +13% MoM, +47.4% YoY, +34.03% YTD, and +17.75% QoQ. By month's end, ICTSI alone accounted for 64% of the services index! (Figure 2, lowest chart) 

Figure 3 

At that point, it is not inaccurate to say ICTSI is the services index—the sector classification has become little more than a wrapper around one stock. (Figure 3, topmost visual) 

When a single company accounts for nearly two-thirds of an entire sector's capitalization, movements in that sector cease to reflect the collective judgments of numerous businesses. Instead, they increasingly mirror the behavior of one dominant security. 

Markets derive their informational value from decentralization. The broader the participation, the richer the information embedded within prices. Conversely, as leadership narrows, prices increasingly cease to aggregate dispersed knowledge and instead become reflections of concentrated flows of capital. 

Price discovery is fundamentally a distributed process. Every listed company conveys information about a different segment of the economy—consumer demand, credit conditions, exports, construction, manufacturing, property, investment, and countless firm-specific developments. As market leadership contracts into progressively fewer securities, the amount of independent information incorporated into the benchmark necessarily diminishes, regardless of whether the index itself continues rising. 

The issue, therefore, is not merely index concentration. 

It is the gradual replacement of decentralized market discovery with benchmark construction increasingly dependent upon the fortunes—and bidding activity—of a handful of securities. 

This is central to understanding what has unfolded within the Philippine equity market over the past year. 

If concentration has indeed become the benchmark's defining characteristic, the natural place to verify it is market breadth. 

IV. Market Breadth Tells a Different Story 

Headline indices often conceal more than they reveal. 

The PSEi's impressive 4.65% gain in June appeared to signal a broad-based recovery in Philippine equities. Yet beneath the benchmark's encouraging performance lay a markedly different reality. 

Although sixteen of the PSEi's thirty constituent companies advanced during the month while fourteen declined, the average gain among all thirty members was barely 0.3%—despite ICTSI's extraordinary 18.3 % surge! (Figure 3, middle diagram) 

Market breadth painted an even weaker picture. Total issues favored sellers, 2,049 to 1,738, while decliners outnumbered advancers during fourteen trading sessions compared with only seven advancing days. 

In other words, the benchmark appeared healthy while much of the market continued to struggle. 

The divergence became even more striking when viewed over the first half of 2026. 

Although the PSEi finished the semester nearly unchanged, declining by only 0.26%, the average return among its thirty constituents was a negative 6.8 %. 

More tellingly, twenty-one of the index's thirty companies were in negative territory! (Figure 3, lowest graph) 

Figure 4

2026's advance-decline spread worsened back to 2022 levels, reversing three years of gradual improvement. (Figure 4 topmost window) 

The average share of main-board value commanded by the top 10 brokers held at 63.46% in June and 62.26% for the half — concentration not just in names, but in the hands executing the trades. 

The principal reason for this discrepancy was straightforward. 

ICTSI alone returned 56.97 % during the first semester! 

This is the arithmetic of capitalization-weighted indices. A sufficiently large company need not merely outperform; it can increasingly overwhelm the collective performance of the remaining constituents. Consequently, the benchmark begins communicating something fundamentally different from what the average listed company is experiencing. 

Capitalization weighting is not itself the problem. Such indices are designed to reflect the market value investors collectively assign to listed firms. The concern arises when sustained gains become increasingly dependent upon a narrow set of (one or two) constituents, causing the benchmark to communicate strength that is no longer broadly shared across the market it purports to represent. 

This is not merely a deformation of representation but strikes at the heart of price discovery. 

The purpose of an equity index is to summarize the collective judgments of thousands of market participants regarding the prospects of corporate Philippines. As leadership narrows, however, the benchmark progressively ceases to represent dispersed information and instead becomes an increasingly concentrated expression of capital flowing into a handful of securities. 

The index still moves. But it carries progressively less information about the broader market. 

As informational density declines, benchmark movements become increasingly susceptible to being interpreted as evidence of economic strength when they may instead reflect increasingly concentrated capital allocation—or the cumulative effects of capital misallocation. 

Because policymakers, investors, and the public often treat the index itself as a proxy for underlying economic conditions, they risk understating the market's growing fragility and the distortions developing beneath an apparently “resilient” benchmark 

This is benchmark-ism: political and institutional narrative management aimed at cultivating perceptions of stability by embellishing financial markets and manicuring headline statistics to sustain "animal spirits." 

V. PSEi 30-ICTSI’s Liquidity-Gains Drive Volume 

Price appreciation of this magnitude does not occur in a vacuum. 

Persistent advances require not only willing buyers but a continuous flow of liquidity capable of absorbing selling pressure as valuations rise. Markets require continuous buying pressure to sustain extraordinary valuations. ICTSI's remarkable advance therefore demanded an equally remarkable expansion in trading activity. 

That is precisely what transpired. 

During June, ICTSI's trading volume climbed to an unprecedented Php 37.7 billion, a 41% increase from the previous month. This represented 26.52% of the Philippine Stock Exchange's Main Board Volume (MBV), contributing materially to the exchange's overall 19.6% increase in trading activity. Foreign transactions accounted for only 8.12% of ICTSI's Main Board Volume, suggesting that domestic institutional flows remained the dominant source of turnover. (Figure 4, middle image) 

Liquidity, therefore, became increasingly concentrated around the benchmark's largest constituent. 

Liquidity performs an economic function beyond merely facilitating transactions. It enhances marketability by enabling continuous exchange among market participants, allowing prices to incorporate dispersed information. As trading activity becomes increasingly concentrated in one security, the informational content of prices across the broader market diminishes, weakening the market's ability to guide capital toward its most productive uses. 

Such concentration is economically significant because liquidity itself becomes a scarce resource. Investment capital is finite at any given point in time. Every peso repeatedly committed to sustaining one increasingly dominant security represents capital unavailable for competing firms, alternative sectors, or productive investment elsewhere in the economy. 

Rather than facilitating broader price discovery, liquidity becomes centralized, reinforcing the very concentration that generated the benchmark's impressive performance in the first place. 

Concentration, therefore, is not merely an outcome. It becomes a mechanism capable of perpetuating itself. 

This creates a self-reinforcing dynamic. 

The implicit design/expectation is that sufficiently strong benchmark performance will eventually spill over into the broader market through sectoral ‘rotation,’ allowing the initial concentration of liquidity to evolve into generalized participation—the familiar "rising tide lifts all boats" dynamic. 

VI. July's “UMIC” Rally—and the Missing Confirmation 

Predictably, many observers attributed July's continued advance to the Philippines' attainment of Upper Middle-Income Country (UMIC) status. 

From July 1 to July 17, the PSEi gained 366.94 points, or 6.08 %. ICTSI alone contributed 186.9 points, accounting for more than half (50.94 %) of the benchmark's free-float return! 

The five largest constituents—ICTSI, SM Investments, BDO, BPI, and SM Prime—collectively generated 75.69 % of the index's advance. 

ICTSI's PSEi weight hit a record 27.47 % on July 13 before easing slightly to 26.97 % by week's end (July 17). Meanwhile, the ICTSI-led top five market-cap components reached a historic 56.12 % share of the benchmark! (Figure 4, lowest diagram) 

This isn't retail FOMO (fear of missing out), nor is it a thematic rally riding a global narrative. Unlike South Korea's Samsung and SK Hynix AI-driven melt-up, none of ICTSI's international peers—notably Adani Ports or Shanghai International Port—display anything resembling this price behavior, as previously pointed out. 

The parabola is local, institutional, and largely unaccompanied by comparable moves among global port operators. That makes it considerably more difficult to attribute solely to sectoral fundamentals or international market trends, leaving sustained institutional bidding activity as the more plausible explanation. 

More importantly, the benchmark’s optimism stood isolated, unsupported by the broader signals of domestic financial markets. 

If the UMIC upgrade truly represented a fundamental reassessment of the Philippine economy, one would reasonably expect that optimism to extend beyond equities. A stronger peso and declining government bond yields would normally accompany a broad improvement in investor perceptions. 

Instead, the opposite occurred.

Figure 5

While the PSEi continued advancing, the peso failed to exhibit comparable strength (USD/PHP rose from 61.36 on June 30 to 61.587 on July 17), while Treasury yields largely remained elevated across the belly of the curve, with the principal exception of shorter-term Treasury bills. (Figure 5, upper chart) 

Equity investors focus primarily on expected corporate earnings, foreign exchange markets continuously price the interaction of external and domestic forces—including competitiveness, capital flows, and relative monetary conditions—while government bond markets evaluate sovereign fiscal and monetary risks. 

When these markets tell different stories, the divergence itself becomes valuable information. 

When a purported improvement in national fundamentals is reflected almost exclusively in one segment of one financial market—particularly one increasingly dominated by a handful of securities—the absence of confirmation elsewhere becomes analytically significant rather than incidental. 

Rather than confirming a broad-based improvement in Philippine fundamentals, July's market action suggests that optimism remained concentrated within a relatively narrow segment of the financial system—a product of benchmark-ism. 

The timing adds a further dimension. The UMIC designation arrived ahead of the President's State of the Nation Address (SONA), with approval ratings at record lows. Whether by design or coincidence, a rallying PSEi headline serves the same political function as a favorable labor report or a narrowing fiscal deficit: it contributes to the official narrative of resilience at a moment when that narrative requires the most support. 

The index becomes not merely a financial benchmark but a communications asset — selectively legible as evidence of progress precisely when progress is most politically necessary. 

The question is whether the incentive structure surrounding the index, the SONA, and the approval ratings creates conditions in which such concentration is tolerated, encouraged, or simply left unexamined. 

VII. When Daily Trading Patterns Become the Story 

How was the July run actually achieved? 

The same intraday choreography repeated for two straight weeks: frantic early bidding concentrated on ICTSI, generating momentum that encouraged broader market participation and invited additional buying interest. 

Then came the reversal of what I had previously been described as the "afternoon delight"—the synchronized push into the close. The pattern increasingly appeared to shift toward synchronized distribution, with early buyers potentially realizing gains into the retail and institutional demand created by the day's momentum. This phenomenon was already visible in Part I but became considerably more pronounced throughout July. (Figure 5, lower graph) 

The timing and intensity naturally varied from day to day. 

The pattern across two weeks did not. 

A sequence this consistent, occurring with this degree of concentration in the benchmark's dominant constituent, does not resemble ordinary fragmented market activity. It suggests a level of synchronization that warrants closer examination—what might as well be described as the activity of an undeclared "national team." 

Whether such behavior reflects coordinated positioning, institutional incentives created by benchmark mechanics, or activity requiring regulatory investigation is ultimately a matter for market surveillance. 

Market forensics is the responsibility of regulators, not commentators. 

Yet regulatory scrutiny does not occur in a vacuum. When institutions, policymakers, and market operators have collectively embraced a rising benchmark as evidence of confidence and stability, the incentives for early intervention becomes distorted. 

The same narrative that celebrates market strength also discourages examination of the mechanisms sustaining it. 

This is where moral hazard emerges. When participants observe market outcomes being reinforced or supported by political and institutional actions, risk perception further risks becoming detached from underlying conditions. 

Regulatory attention may arrive only after the cycle reverses, when the costs of previously tolerated distortions become impossible to ignore.

Figure 6

Yet, this past week did show broader participation—21 gainers, 7 decliners, and 2 unchanged—for a 1.87 % week-on-week advance. Yet the average gain was only 1.54 %, still lower than the headline return and still largely explained by market-cap weighting rather than genuine breadth. (Figure 6, upper visual) 

Tellingly, ICTSI's trading volume peaked on July 10 and has since declined, even as Main Board volume rebounded on Friday. (Figure 6, lower graph) 

Read plainly, ICTSI's own engine may be losing momentum even as the index it drives continues climbing on residual momentum. Alternatively, the extraordinary buying pressure sustaining the rally may simply be encountering natural limits. 

VIII. Concentration and Shrinking Market Participation 

The concentration visible in the equity market does not exist in isolation.

Figure 7

The PSE's own 2025 data shows both retail and institutional participation remarkably shrinking, with active institutional accounts declining from 7,622 in 2022 to roughly 4,366 in 2025. (Figure 7, upper chart) 

That’s right. Fewer active accounts controlling a larger share of trading activity is not a paradox; it is the mechanism through which concentration expresses itself. 

The concern is not merely that fewer participants are active. It is that market influence increasingly resides among a narrower group of actors, reducing the diversity of independent judgments incorporated into prices and increasing the surface area for synchronized positioning. 

The decline in participation may itself be a consequence of this process. When outside participants—whether retail investors or independent institutions—repeatedly find themselves disadvantaged by a market increasingly dominated by insider-directed, concentrated flows from the undeclared "national team," participation naturally declines. 

Losses, frustration, and the perception that the game is structurally tilted toward a small circle of powerful participants create withdrawal, leaving the remaining pool of active capital even more concentrated. 

In this sense, declining participation is not merely a separate statistic. It is a ramification of policies and institutional tolerance that permit a market structure where concentration reinforces itself—facilitating the redistribution of trading gains, liquidity, and market influence toward dominant participants while weakening the broader participation necessary for genuine price discovery. 

Concentration, therefore, is not only a condition of the market. 

It becomes a self-reinforcing process. 

IX. Concentration Across the Financial System 

This concentration extends beyond the exchange itself. 

It mirrors developments within the Philippines’ financial system, where total banks led by universal and commercial banks now control a record 83.14% of total financial-system assets, with universal and commercial banks alone accounting for 77.08% as of Q2 2026—a share that has risen steadily since 2008 and accelerated following the pandemic. (Figure 7, lower graph) 

Concentration in the credit system and concentration in the equity benchmark are not separate stories. 

They are the same story expressed through different balance sheets. 

The connection is not merely institutional ownership or market influence. Bank balance sheets are themselves exposed to asset valuations, including equity holdings, securities investments, and collateral values that support lending decisions. When asset prices become increasingly concentrated, the financial system inherits exposure to the stability of those same valuations. 

The allocation of savings, the creation of credit, and the valuation of listed assets are increasingly shaped by a smaller number of institutions. The result is not merely greater efficiency or scale; it is a financial system in which fewer decision points increasingly influence the direction of capital flows and the transmission of financial risk. 

This creates a second-order vulnerability—one that the BSP's latest Financial Stability Report itself acknowledges. 

When collateral values decline, banks may be forced to reassess exposures, increase provisions, reduce lending, or raise capital buffers. The feedback mechanism works in reverse: asset weakness pressures balance sheets, weaker balance sheets restrict credit, and tighter credit conditions accelerate economic stress. 

The BSP's recent capital-relief measures demonstrate the tension facing regulators: while such measures may temporarily ease balance-sheet pressures, their repeated use reveals the diminishing effectiveness of successive interventions. As the effects of previous measures accumulate without resolving underlying mismatches, additional accommodation becomes increasingly necessary merely to maintain existing conditions. Rather than restoring normal adjustment mechanisms, repeated intervention risks deepening balance-sheet dependence on continued support and reinforcing the concentration that created the vulnerability in the first place. 

The political convenience of concentration is therefore accompanied by a growing systemic risk. A financial structure built around fewer and larger institutions may appear stable during expansionary periods, but its vulnerabilities become more pronounced when the assets, collateral values, and market narratives supporting that stability begin to reverse. 

X. Benchmark-ism: From Market Benchmark to Political Instrument 

Here the ICTSI show stops being a market curiosity and becomes a stagflation-series exhibit. Deepening centralization — in banks, in brokers, in the index itself — hands the establishment ammunition to dominate the Overton window through benchmarkism: shaping political narrative via statistics and market signals that appear neutral but are, in fact, constructed. 

The objective isn't merely the survival of the current administration, though that's part of it. It's sustaining a model in which easy money and cheap access to public savings keep the savings-investment gap open long enough for the rent-seeking, build-and-they-will-come model to keep running — a model that benefits the government and entrenched elites first, and the broader public only as runoff, if at all. 

Applied to the PSE, when a benchmark designed to aggregate the collective judgment of investors increasingly reflects the trading behavior of one dominant constituent, valuations lose informational content, economic calculation becomes distorted, and capital allocation becomes vulnerable to misdirection. 

In practice, capital is not formed; it is consumed through investments sustained by distorted signals, artificial liquidity, and expectations of future gains unsupported by productivity. 

Asset bubbles are, at their core, manufactured claims on wealth without the foundation to validate them — a something‑for‑nothing process. 

Capital appears to multiply through rising valuations, but when those valuations fail to correspond with genuine returns, resources committed to sustaining them are evenutally revealed as consumed rather than formed capital. 

And when a bubble is celebrated by the very institution meant to police it, that celebration isn’t confidence — it is the late‑cycle tell, the applause that arrives just before the topping process begins, or signals its inflection point. 

XI. Conclusion: The Applause Before the Inflection Point 

Part I warned that ICTSI had become the PSEi’s single point of vulnerability. Part II shows that the vulnerability has metastasized into a system of concentrated liquidity, shrinking participation, and benchmark-driven narrative management. 

Now, with the Iran war reigniting and the risk of an AI-driven global slump beginning to spill across markets, the external shock may become the catalyst that exposes the imbalances already embedded beneath the PSEi’s rally. 

When an exchange celebrates a bubble instead of interrogating it, the applause is no longer a sign of confidence—it is the late-cycle sound heard just before the market discovers what price discovery was supposed to reveal all along. 

____

Reference: 

PSEi 30: The ICTSI Show June 7, 2026

 

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings

  

This is the same mentality that drives every sovereign debt crisis. Governments become disconnected from the source of their funding. They begin treating taxpayer money as an unlimited resource rather than the product of someone else’s labor. Every expenditure can be justified. Every program becomes essential. Every privilege becomes a necessity. Meanwhile, the national debt continues to rise—Martin Armstrong 

In this issue

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings

Part 1: The Ratings Agencies Finally Catch Up

Part 2: The Political Economy of the Intervention Ecosystem

2A. Basel, Sovereign Debt, and the Savings-Investment Gap

2B. Five Relief Measures, One Intervention Regime

2C. Confidence Management: BSP Rebuts Fitch

2D. Policies Are Never Neutral

2E. The Feedback Mechanism Begins to Fail

Part 3: Wile E. Coyote Begins to Lose Altitude

3A. Sovereign-Bank Doom Loop: Financing the State Before Financing the Economy

3B. The Hidden Losses Continue to Grow

3C. Liquidity Reveals What Capital Ratios Conceal

3D. Deposits Rise—But Why?

3E. Funding Conditions Become Increasingly Demanding

Part 4: Conclusion: The Balance Sheet Speaks 

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings

Moody's and Fitch have finally caught up. The balance sheet explains why. 

Part 1: The Ratings Agencies Finally Catch Up 

Within days, the world's two largest credit-rating agencies issued successive warnings on the Philippine banking system. 

Moody's first revised its outlook on Philippine banks to ‘Negative’, citing weakening household consumption, softer loan demand, rising credit impairments, and slowing government spending. 

Days later, the agency issued a second warning, describing the BSP's latest capital-relief measure as ‘credit negative’, arguing that excluding unrealized losses on government securities from regulatory capital calculations reflected increasing balance-sheet pressures rather than genuine strengthening. 

Notably, the warning represented a marked shift from Moody's assessment only months earlier, when the agency viewed the BSP's capital-relief measures more favorably. The reversal illustrates how rapidly external assessments can change once balance-sheet vulnerabilities become more difficult to ignore. 

Fitch Ratings soon followed. 

It downgraded its outlook on Philippine banks from ‘Neutral’ to ‘Deteriorating,’ warning that slower economic activity, rising credit costs, rapid unsecured consumer lending, and weakening profitability would increasingly pressure the sector. Earlier, Fitch had also revised the Philippine sovereign outlook to Negative, citing slower public spending, fiscal deterioration, and the inflationary consequences of higher oil prices. 

Both agencies have finally acknowledged stresses that balance-sheet data, market behavior, and this series have documented for years. 

Ironically, neither Moody's nor Fitch identified the gradual deterioration while it was unfolding. Instead, both reacted only after a series of highly visible developments—including the Middle East oil shock, concerns over public spending associated with the corruption investigation, the persistent rise in Philippine Treasury yields, and the deterioration in bank share prices—made the underlying fragilities increasingly difficult to ignore. 

This pattern is not an isolated shortcoming. It reflects the institutional character of modern credit-rating agencies. 

Major rating agencies—Moody's, Fitch, and S&P—operate under an issuer-pays business model that embeds a persistent principal-agent problem. They are compensated by the very institutions whose creditworthiness they evaluate, making their commercial incentives structurally dependent on maintaining long-term issuer relationships. At the same time, their reputations depend on avoiding assessments that diverge too sharply from prevailing market consensus before the evidence becomes widely accepted. Ratings that prove prematurely pessimistic risk damaging institutional credibility, while ratings that move alongside emerging market consensus are considerably easier to defend ex post. The resulting incentive structure favors gradual convergence rather than early diagnosis of structural deterioration. 

The 2008 Global Financial Crisis remains the clearest illustration. Rating agencies assigned investment-grade ratings to mortgage-backed securities even as the quality of their underlying collateral deteriorated. Subsequent investigations concluded that the combination of the originate-to-distribute model and issuer-paid ratings systematically weakened independent credit assessment, allowing confidence to persist until the financial system itself became unstable. 

The Philippine experience exhibits similar characteristics. 

For years, Philippine bank profitability had already begun slowing. Profit growth peaked around the second quarter of 2021 before entering a prolonged deceleration. Yet the PSE Financial Index continued advancing, reaching its cyclical peak only in March 2025. The divergence between weakening earnings momentum and rising market valuations reflected an expanding disconnect between underlying fundamentals and market expectations.

Figure 1 

The eventual reversal should not have been surprising. 

Today, both profit growth and the Financial Index are declining as market valuations gradually converge toward balance-sheet realities that had long been obscured by abundant liquidity, optimistic narratives, expectations of continued policy accommodation, and price support originating from large financial institutions. (Figure 1, topmost pane) 

The phenomenal rise in the Financial Index from September 2020 to March 2025, largely reflected appreciation in its dominant constituents. As of late June 2026, BDO, BPI, and Metrobank accounted for nearly four-fifths of the index's market capitalization, making movements in a handful of banks sufficient to sustain the appearance of sectoral strength. Although they comprised less than one-fifth of the PSEi 30 (also as of late June), their size and influence made them likewise important contributors to the performance of the headline index. 

During much of the previous bull market, other financial corporations (OFCs) also played a material role in supporting banking share prices, further weakening the informational content of market prices. 

OFC claims on depository corporations rose broadly in tandem with the Financial Index, suggesting that expanding OFC financing helped support bank share prices. However, after reaching a record high in the fourth quarter of 2025, OFC claims began to diverge from the Financial Index beginning in the first quarter of 2025, indicating that this source of support had begun to weaken. (Figure 1, middle image) 

With the Financial Index declining throughout 2025, however, market valuations began adjusting before the rating agencies revised their assessments. 

Their recent actions therefore represent confirmation rather than discovery. The warnings validate developments that had already become evident in BSP statistics, in the progressive deterioration of bank profitability, in weakening banking-equity/Financial Index performance, and in the increasingly frequent policy accommodations undertaken by the BSP. 

This distinction is fundamental because it separates empirical description from causal explanation. Rating agencies describe conditions once they become sufficiently visible. They do not explain why those conditions emerged. 

The factors emphasized in the recent downgrades—higher oil prices, slower government spending, weaker household demand, and rising credit costs—are undoubtedly relevant. But they function primarily as catalysts rather than causes. 

Philippine banking-sector fragility did not originate with the latest geopolitical shock, nor did it suddenly emerge because of corruption investigations or weaker fiscal spending. Those developments merely exposed vulnerabilities that had accumulated over many years through policy choices, regulatory incentives, and increasingly interventionist financial arrangements. 

Understanding that process requires moving beyond current events toward the institutional framework governing Philippine finance. The common thread connecting slowing profitability, declining liquidity buffers, record sovereign exposures, repeated BSP capital-relief measures, and successive rating-agency warnings is not the latest external shock. 

It is the cumulative consequence of a policy regime that has increasingly substituted intervention for adjustment. 

Modern central-bank intervention is no longer a collection of isolated policies. It has become an ecosystem. Understanding that ecosystem—not merely its latest manifestations—is the central objective of this essay. 

Part 2: The Political Economy of the Intervention Ecosystem 

If Part 1 established that Moody's and Fitch merely recognized Philippine banking stress after it had become increasingly visible, the more important question remains unanswered. 

Why has the banking system become progressively dependent on successive regulatory accommodations in the first place? 

The answer cannot be found in the recent oil shock, the corruption investigation, or slowing GDP growth. Those developments merely exposed vulnerabilities that had accumulated over many years. 

The deeper explanation is institutional. 

The Philippine banking system has gradually evolved into an intervention ecosystem in which fiscal policy, monetary policy, prudential regulation, and financial markets increasingly reinforce one another. The result is a self-reinforcing sovereign-bank nexus, where interventions introduced to alleviate one problem progressively create the conditions requiring the next. 

2A. Basel, Sovereign Debt, and the Savings-Investment Gap 

The BSP's latest relief measures did not emerge in isolation. 

Their foundations were laid years earlier. 

Modern prudential regulation under the Basel framework assigns highly preferential regulatory treatment to sovereign obligations. Government securities generally receive lower regulatory capital charges while simultaneously qualifying as high-quality liquid assets for liquidity requirements. 

Banks responded accordingly. 

As fiscal deficits widened and the domestic savings-investment gap persisted, government borrowing increasingly flowed through the banking system. Philippine banks accumulated record holdings of government securities, which now comprise roughly one-third of total banking assets—the highest in Asia, while debt securities classified under amortized cost likewise reached unprecedented levels. (Figure 1, lowest graph) 

Note: The share reported here differs from the roughly 30% figure cited elsewhere because of differences in measurement. This chart uses net claims on the central government as a share of total banking-system assets, whereas other sources often report total holdings of government securities (or include broader public-sector claims) as a share of assets. Although the definitions differ, both measures point to the same underlying trend: Philippine banks have become increasingly exposed to sovereign debt. 

The arrangement appeared mutually beneficial while interest rates remained exceptionally low. Governments obtained inexpensive financing. Banks benefited from favorable regulatory treatment. Reported capital ratios remained strong. Expanding sovereign portfolios came to be viewed as evidence of prudence rather than concentration. 

Yet policies are never neutral. 

The same incentives that encouraged banks to finance government deficits also concentrated duration risk on bank balance sheets. Once long-term interest rates began rising, unrealized losses accumulated almost inevitably. 

The present mark-to-market problem therefore did not originate with the recent rise in Treasury yields. Higher yields merely exposed vulnerabilities embedded years earlier through regulatory incentives and reinforced by persistent fiscal dependence on the banking system. 

Viewed through this lens, today's banking pressures are not an isolated financial event. They are the institutional consequence of a prolonged policy regime. 

2B. Five Relief Measures, One Intervention Regime 

Against this backdrop, the succession of recent BSP interventions becomes considerably more revealing. 

Figure/Table 2 

Within only a few months, regulators and the National Government implemented a remarkable sequence of accommodations. (Figure/Table 2) 

Following Executive Order No. 110 and the declaration of a National Energy Emergency, in April, banks received temporary regulatory relief allowing affected loans to avoid immediate non-performing classification while repayment schedules for agricultural borrowers were extended. 

The government subsequently lengthened salary-loan maturities to as much as seven years, reducing immediate repayment burdens while extending household leverage further into the future. 

The BSP introduced a Positive Neutral Countercyclical Capital Buffer framework, permitting banks to draw down previously accumulated capital during periods of stress. 

Regulators also revised rules governing intragroup guarantees and credit-risk transfers to provide greater flexibility in regulatory capital treatment. 

Finally, the BSP temporarily excluded unrealized losses on peso-denominated government securities from regulatory capital calculations, preventing mark-to-market losses from immediately reducing reported Common Equity Tier 1 ratios. 

The pattern of interventions is clear. As banking-sector pressures emerge, authorities increasingly respond through regulatory accommodation rather than balance-sheet adjustment. 

• Accommodation postpones adjustment.
• New pressures subsequently emerge.
• Additional accommodations follow. 

Intervention increasingly becomes the primary mechanism through which adjustment itself is managed. 

Intervention thus evolves from a temporary response into a self-reinforcing mechanism that perpetuates the need for further intervention. 

This is precisely why Moody's second warning deserves closer attention. 

Ironically, while the BSP presented its latest capital-relief measure as supporting financial stability, Moody's characterized the same measure as ‘credit negative.’ 

The significance lies not in Moody's opinion itself. Rather, the rating agency inadvertently acknowledged what the policy implicitly reveals. If Philippine banks were genuinely as “resilient” as official narratives repeatedly suggest, successive relief measures would be unnecessary. 

The interventions themselves become evidence of the underlying condition they are intended to manage.

2C. Confidence Management: BSP Rebuts Fitch 

The same pattern emerged following Fitch's decision to revise its outlook on the Philippine banking sector to "deteriorating." Rather than engaging the underlying balance-sheet concerns raised by Fitch—slowing profitability, rising credit costs, deteriorating consumer-credit quality, and mounting macroeconomic risks—the BSP issued an official rebuttal emphasizing the banking system's resilience, strong capitalization, and prudent supervision. 

The response illustrates another dimension of the intervention ecosystem: confidence management. 

Financial stability increasingly depends not only on liquidity facilities and regulatory accommodation but also on sustaining confidence through official communication, supervisory discretion, accounting treatment, statistical embellishments, market-price support, and managing information. 

Here one is reminded of Otto von Bismarck's famous observation: 

"Never believe anything in politics until it has been officially denied." 

The quotation need not be interpreted literally. Rather, it illustrates a broader principle: official denials often reveal where authorities perceive the greatest political or financial vulnerability. Communicative reassurance, when accompanied by repeated intervention, creates its own internal contradiction. 

Demonstrated preference in motion: Actions ultimately reveal more than statements. 

If the banking system is indeed as resilient as repeatedly claimed, the growing sequence of relief measures, accounting accommodations, capital waivers, repayment extensions, and supervisory flexibility becomes increasingly difficult to reconcile with that narrative. 

As a whole, Moody's first warning, Moody's second warning, Fitch's deteriorating outlook, and the BSP's official rebuttal are best understood not as separate news events but as different responses to the same underlying balance-sheet reality.

2D. Policies Are Never Neutral 

Modern intervention rarely operates through monetary policy alone. To remain effective, it increasingly extends into prudential regulation, accounting treatment, supervisory discretion, statistical presentation, market-price support, and official communication. The objective gradually shifts from correcting underlying imbalances toward preserving confidence despite those imbalances. 

Confidence, however, is not synonymous with resilience. 

Market prices, capital ratios, official statistics, and regulatory classifications increasingly become components of a broader architecture of confidence management. 

This recalls the argument developed in Stagflation Part 9 regarding statistical simulacra. Confidence management increasingly involves directing public attention toward officially presented indicators while managing information about underlying conditions. 

Policies are never neutral. 

Every policy accommodation redistributes costs and benefits while reshaping future incentives. Banks carrying substantial unrealized losses receive capital relief. Governments retain easier access to domestic financing. Institutions that managed liquidity and duration risk more conservatively receive comparatively fewer advantages. The public receives progressively less transparent balance sheets, while future taxpayers inherit greater contingent liabilities, capital is consumed, and the purchasing power of money erodes. 

Perhaps more importantly, repeated accommodation alters expectations. 

When losses repeatedly receive regulatory relief, incentives increasingly favor postponement over recognition. When accounting treatment becomes progressively more flexible, opportunities for accounting arbitrage naturally expand. When capital requirements become adjustable, pressure to raise fresh equity correspondingly diminishes. 

Policies influence behavior because they alter the expected rewards and penalties facing economic actors. 

As the great Ludwig von Mises argued, intervention possesses its own internal logic. Each intervention generates distortions that subsequently justify additional intervention. 

Historian Charles Kindleberger's sauve qui peut similarly reminds us that periods of financial stress intensify incentives to preserve appearances, transfer adjustment elsewhere, and ultimately culminate in what he famously described as the "emergence of swindles." 

Economist János Kornai's soft-budget constraint explains how repeated accommodation gradually conditions institutions to expect further accommodation, thereby entrenching dependence on future intervention. 

As one, these perspectives describe how policy reshapes the political economy. The intervention ecosystem does not merely postpone adjustment. It alters the adaptive behavior of the financial system itself. 

2E. The Feedback Mechanism Begins to Fail 

Perhaps the greatest cost of repeated intervention is not its immediate fiscal expense or temporary accounting opacity. 

It is the gradual deterioration of the market's feedback mechanism.

• Markets are increasingly managed to produce an optic of stability.
• Prices become less informative.
• Balance sheets become more difficult to manage and interpret.
• Statistics increasingly reflect administrative treatment more than the underlying economic reality.
• Capital allocation responds progressively more to regulation than entrepreneurship. 

Meanwhile, scarce domestic savings continue flowing toward sustaining existing politically induced structures rather than financing new productive investment. 

Austrian economist Frank Shostak's observation becomes increasingly relevant. Fiscal and monetary rescue measures appear effective only while supported by an adequate stock of genuine private savings. As real savings become progressively constrained, successive interventions generate diminishing economic benefits while simultaneously increasing distortions and fragility. 

In this sense, intervention gradually begins consuming the very foundation upon which it depends. 

If this diagnosis is correct, its consequences should already be visible in the Philippine banking system's balance sheet. 

The April and May BSP data suggest precisely that. 

Part 3: Wile E. Coyote Begins to Lose Altitude 

For several years, Philippine banking has what I have aptly described through the metaphor of Wile E. Coyote. 

The analogy remains instructive. 

A cartoon character running beyond the edge of a cliff continues forward motion until gravity is finally acknowledged. Momentum temporarily sustains the illusion of stability, even after structural support has disappeared. 

The same dynamic has characterized Philippine bank lending. 

For much of the previous cycle, rapid loan expansion repeatedly outpaced the growth of non-performing loans, producing the appearance of stable asset quality through what we previously described as a denominator effect. As long as total lending grew faster than impaired assets, reported ratios remained contained, masking underlying deterioration. 

Eventually, however, arithmetic reasserts itself. 

The May data suggest that this transition may now be underway.

Figure 3

Gross non-performing (NPL) loans rose 14.0 % year-on-year, outpacing total loan growth of approximately 11.9 %. As a result, the gross NPL ratio continued its steady ascent—from 3.29 % in March to 3.37 % in April and 3.44% in May. (Figure 3, topmost window) 

Gross NPLs (in pesos) also reached a new record for the second consecutive month. 

The denominator is no longer keeping pace. 

Wile E. Coyote is beginning to feel gravity. 

Loan-loss reserves likewise reached record levels in peso terms. However, provisioning continues to lag overall loan expansion, suggesting that while buffers are increasing, they are not rising fast enough to fully offset the growth of risk exposures. (Figure 3, middle diagram) 

The deterioration therefore extends beyond headline ratios. It is increasingly embedded in the structure of the balance sheet itself.

3A. Sovereign-Bank Doom Loop: Financing the State Before Financing the Economy 

The asset side of bank balance sheets reinforces the same structural shift. 

Net claims on the central government (NCoCG) reached another record in April, while holdings of debt securities (mostly government) under amortized-cost classifications (formerly Held-to-Maturity or HTM) also hit a milestone last May. (Figure 3, lowest chart) 

This is not incidental. 

Under Basel-aligned prudential frameworks, sovereign obligations receive preferential regulatory treatment through lower capital charges and favorable liquidity classification. Banks responded exactly as incentives dictated. 

Over time, this has resulted in a gradual but persistent reallocation of bank balance sheets toward sovereign financing. 

Government borrowing increasingly absorbs domestic savings that might otherwise have supported private-sector credit formation. The banking system, in effect, has become a primary intermediary of fiscal financing. 

The result is not merely concentration risk. 

It is a structural transformation of intermediation itself—from financing entrepreneurial activity to financing the state. 

In this configuration, the savings–investment gap is increasingly mediated through public debt rather than private capital formation. 

The implication is straightforward: sovereign funding needs and bank balance-sheet structure become progressively intertwined, with each reinforcing the other over time. 

Or, this dynamic evolves into a sovereign-bank doom loop: banks’ balance sheets become increasingly saturated with sovereign risk, while the state becomes progressively dependent on domestic banks for financing. Each side reinforces the other, tightening the link between fiscal conditions and banking-sector stability. 

Sovereign risk becomes bank risk, and vice versa. 

3B. The Hidden Losses Continue to Grow 

The second channel of stress is less visible but equally important.

Figure 4

Available-for-sale (AFS) portfolios reached its second highest level in May, while unrealized losses rose to approximately Php 175 billion—exceeding the valuation losses recorded during the post-pandemic inflation shock following the Russia–Ukraine conflict. (Figure 4, upper graph) 

This unparalleled deterioration coincided with a sharp rise in Philippine Treasury yields. Yet, while 10-year yield spiked to the same level as 2022, the losses were much greater today. (Figure 4, lower image) 

The mechanism is direct. 

As yields rise, the market value of existing government securities declines. Given the unprecedented share of sovereign instruments on bank balance sheets, this translates into immediate valuation losses, reduced capital flexibility, and greater sensitivity to further rate movements. 

The BSP classifies these losses as temporary volatility. 

Economically, however, they are not temporary. They represent the opportunity cost of prior duration decisions shaped by the prevailing regulatory environment. 

Capital relief alters their regulatory treatment. 

It does not restore the lost economic value. It exacerbates them.

3C. Liquidity Reveals What Capital Ratios Conceal 

Asset quality and valuation effects are only part of the picture. Liquidity conditions provide an earlier signal of stress. 

Here, the evidence is increasingly consistent.

Figure 5

The cash-to-deposit ratio remains near historic lows despite modest improvement in April. Meanwhile, the liquid-assets-to-deposit ratio continued to weaken, falling to approximately 46.7 % in May—its lowest level since the pandemic period. (Figure 5 upper image) 

This is a notable weakening of liquidity buffers. 

During the pandemic, extraordinary BSP liquidity injections exceeding Php 2.3 trillion produced an unprecedented expansion in system-wide liquidity. That buffer has since unwound. 

Banks now face weakening liquidity conditions even as official narratives continue to emphasize systemic ‘resilience.’ 

The divergence between narrative and balance-sheet conditions is widening.

3D. Deposits Rise—But Why? 

At first glance, deposit growth appears supportive. 

Deposit liabilities continued expanding at double-digit rates through May. 

However, the source of this growth is crucial. 

Broad money (M3) continued to expand at more than 12% annually, even as currency in circulation slowed. At the same time, the BSP’s Monetary Authority Survey (MAS) shows a sharp increase in BSP net claims on the National Government (NCoCG), reaching approximately Php 663 billion last May, largely driven by declining government deposits at the BSP. (Figure 5, lower graph) 

In other words, liquidity increasingly entered the banking system through official channels rather than through underlying economic expansion. 

The composition of money creation therefore matters as much as its quantity. 

Deposit growth driven by public-sector liquidity operations is fundamentally different from deposit growth driven by rising productivity, voluntary savings, or private investment. 

One reflects economic activities. 

The other primarily reflects liquidity redistribution—wealth consumption concealed beneath a façade of sanguine statistics. 

3E. Funding Conditions Become Increasingly Demanding 

The liability side of bank balance sheets reinforces the same pattern.

Figure 6

Bonds and bills payable rose to nearly Php 2 trillion, the second highest levels on record. (Figure 6, upper visual) 

Banks have increasingly relied on wholesale funding, while interbank borrowing has remained volatile and reverse-repurchase activity has fluctuated sharply over the interim—though both are on an uptrend overtime. (Figure 6, lower chart) 

These developments indicate a gradual shift toward more expensive and less stable funding sources. 

Banks are increasingly competing with the National Government and the private sector for access to scarce domestic savings, placing upward pressure on funding costs. 

Like asset composition, funding structure reflects the evolving incentive environment facing the banking system.

Part 4: Conclusion: The Balance Sheet Speaks 

The evidence, viewed collectively, is difficult to dismiss. 

• Record sovereign exposure.
• All-time high amortized-cost securities.
• Biggest unrealized bond losses.
• Record non-performing loans in pesos.
• Milestone lows liquidity buffers.
• Increasing reliance on wholesale funding. 

In aggregate, they portray a banking system operating with progressively narrower margins of safety despite successive rounds of regulatory accommodation. 

This is why Moody's and Fitch should be understood as confirming rather than discovering emerging stress. 

The ratings agencies did not originate the signal. They merely acknowledged conditions that had already become visible in bank balance sheets, market prices, and the increasingly frequent interventions undertaken by policymakers. 

More fundamentally, the recent downgrades reveal the limits of confidence management. 

• Regulatory relief can postpone recognition.
• Accounting flexibility can soften reported capital ratios.
• Official reassurance can influence expectations.

But none can permanently suspend the underlying economics of deteriorating asset quality, mounting sovereign exposure, or tightening liquidity conditions. 

Policies are never neutral. They reshape incentives, redistribute risks, and influence how financial institutions adapt over time. Successive interventions may stabilize the system temporarily, but they also deepen institutional dependence on future intervention, reinforcing the very dynamics they seek to contain. 

The Philippine banking system did not arrive at its present condition because of a single oil shock, corruption investigation, or ratings downgrade. Those events merely exposed vulnerabilities that had accumulated over years through the interaction of fiscal policy, monetary accommodation, prudential regulation, and repeated financial intervention. 

Ultimately, the ratings agencies reacted to the symptoms. The balance sheet reveals the disease.

• Markets can postpone reality.
• Accounting can defer recognition.
• Regulation can delay adjustment.

But none can permanently suspend economic constraints. 

Eventually, the chickens come home to roost. 

____

References: 

Stagflation Part 10: The Politics of Contradiction—Rate Hikes, Liquidity Addiction, and External Constraint Under Balance-Sheet Stress 

Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility 

Stagflation Part 8: Manufacturing Resilience — The PSEi 30 Under Stagflationary Pressure, BSP Accommodation, and the Financialization of Fragility 

Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression 

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning 

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression 

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4) 

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3) 

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook 

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It 

Seed Article 

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention