PSEi 30: The ICTSI Show

 

For most people, the most dangerous self-delusion is that even a falling market will not affect their stocks, which they bought out of a canny understanding of value—Leon Levy

In this issue

PSEi 30: The ICTSI Show

I. PSEi’s 30 Regional Outperformance

II. Misleading Index Performance (MSCI World, KOSPI)

III. The Ideological Foundation

IV. How Does This Relate to the PSEi?

V. One Stock, One Index

VI. Volume, Float, and the Shape of the Market

VII. The Intraday Pattern

VIII. Participation Collapse and Capital Consumption

IX. Conclusion: A Late-Cycle Signal 

PSEi 30: The ICTSI Show 

How concentration, liquidity, and selective speculation are reshaping the Philippine benchmark 

I. PSEi’s 30 Regional Outperformance 

Amid simmering political controversy over control of Senate leadership—which will ultimately oversee the forthcoming impeachment proceedings against the Vice President—the Philippine Stock Exchange Index (PSEi) emerged as Asia’s top-performing equity benchmark for the week, rising 2.94%.

Figure 1

This occurred against an otherwise weak regional backdrop. Rising sovereign yields and continued geopolitical uncertainty weighed on sentiment, leaving most Asian bourses under pressure. While a few benchmarks—such as Japan’s Nikkei, Singapore’s STI, and Taiwan’s Taiex—briefly touched intraweek highs, softer closes erased much of the momentum. Indonesia’s sharp correction and weakness in South Korea’s KOSPI dragged broader regional averages lower. (Figure 1, upper window) 

Yet headline index performance can mislead. 

II. Misleading Index Performance (MSCI World, KOSPI) 

Indices are not neutral reflections of reality; they are constructed representations shaped by methodology, market capitalization, and momentum. They measure a perspective. 

Take the MSCI World Index. The MSCI World purports to track 23 developed markets, yet the US now accounts for roughly 72.45% of the benchmark, with information technology alone at 30.6% and financials at 15.33%. (Figure 1, lower image) 

In practice, the MSCI World has become a proxy for US mega-cap tech. The label has quietly decoupled from what's actually being measured. 

Figure 2

South Korea's KOSPI presents a more dramatic case. Samsung and SK Hynix—dominant in global memory chip supply—recently comprised more than half the KOSPI's market capitalization, piggybacking on the speculative melt-up in US AI stocks. (Figure 2, upper diagram) 

SK Hynix joined the trillion-dollar club in late May. The consequence: the KOSPI's headline performance increasingly reflects two companies, not the broader market nor the national economy. 

The dislocation is visible in the underlying data. The Korean won hit an all-time low last week as bond yields climbed—a sharp divergence between price signals and fundamental conditions. 

Market breadth confirms the distortion: stocks hitting new lows spiked even as those hitting new highs continued to fade. (Figure 2, lower visual) 

As liquidity becomes more selective, capital crowds into a narrowing set of perceived winners. Momentum attracts momentum. FOMO and greater-fool dynamics amplify upside moves, especially when leverage enters the system. The result is not broad-based prosperity but increasingly concentrated leveraged speculative blowoffs.

Figure 3

China offers a parallel. Margin financing has surged to levels exceeding those seen during the 2015 equity boom, even as the Shanghai Composite remains below its prior peak. Reaching lower index highs despite greater leverage suggests diminishing returns from credit-fueled speculation: progressively more debt is required to generate the same market effect. (Figure 3) 

Rising concentration, speculative blowoffs, and record leverage: these are not isolated anomalies. They are convergent signals of late-cycle excess.

III. The Ideological Foundation 

This matters because modern central banking increasingly views asset prices as transmission mechanisms of economic policy. 

The logic is straightforward: higher asset prices generate wealth effects, encourage borrowing, support collateral values, and stimulate spending. In this framework, liquidity injections and policy backstops become implicit supports for financial assets. 

Former Federal Reserve Chair Ben Bernanke summarized this philosophy in the aftermath of the dot-com era:

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse 

That single quote explains the architecture that followed: the successive rounds of monetary accommodation, the reflexive backstops, the tolerance for leverage—all premised on the belief that a competent central bank can contain the fallout from any speculative excess it helped create. Markets did not merely become politicized. They became instruments of policy, kept elevated by design. 

IV. How Does This Relate to the PSEi? 

The Philippine market increasingly displays similar characteristics.

Figure 4

The long-term divergence between the PSEi and International Container Terminal Services Inc. (ICTSI) has become difficult to ignore. 

Since the PSEi peaked in 2017 and entered a prolonged period of stagnation—a bear market, ICTSI has continued to surge, with recent price action increasingly resembling a parabolic advance. (Figure 4, upper window) 

As ICTSI reached a record high of Php 875 on June 3, its weight in the PSEi climbed to roughly 25.5%. (Figure 4, lower chart) 

The implications are significant. 

V. One Stock, One Index 

For the week, the PSEi gained a net 169.72 points, or 2.94%. Yet ICTSI alone contributed approximately 177.63 points to the index. Put differently, ICTSI accounted for more than 100% of the benchmark’s weekly advance (gross), while the remaining components collectively added little or acted as offsets. 

The broader composition of returns reinforces this imbalance.

Figure 5 

Across the PSEi’s 30 members, average weekly performance was only around 0.12%, with 16 issues actually posting losses. Although four of the biggest market cap issues advanced, ICTSI’s 13.62% surge overwhelmingly dominated benchmark performance. (Figure 5, topmost pane) 

Even outside the benchmark, the divergence becomes evident. The broader All Shares Index rose only 1.63%, while aggregate market capitalization increased 2.17%—both materially below the PSEi’s gain. 

Year-to-date performance paints an even starker picture: ICTSI’s share price has surged by 50.8%, while 22 of the 30 listed issues have declined. Remarkably, ICTSI’s strong gains have helped compress overall market losses to an average of just 6.7%! (Figure 5, middle chart) 

VI. Volume, Float, and the Shape of the Market 

Liquidity concentration tells a similar story. 

ICTSI accounted for roughly 29.5% of main board trading volume during the week, exceeding 32% in the final three sessions. 

Foreign buying represented around 9.3% of ICTSI turnover. 

Yet in today’s financialized system, “foreign buying” deserves nuance: overseas registration does not necessarily imply independent foreign institutional capital, as such flows may also reflect affiliates, intermediaries, or networked financial structures linked to domestic interests. 

Broker concentration adds another layer. The top ten brokers accounted for an average of approximately 64% of main-board turnover, underscoring the degree to which market activity remains concentrated among a relatively narrow set of big cap issues. 

This raises a fundamental question about representation. 

The PSEi 30 is intended to track the performance of the country’s 30 largest and most actively traded listed firms and is commonly treated as a barometer of Philippine business conditions. 

Yet context makes the weight anomaly stranger still: ICTSI ranks 16th among PSEi 30 constituents by published assets—Php 568 billion as of Q1 2026. It is not the largest company in the index. 

It is simply the one commanding the most speculative attention or one company has increasingly come to define the behavior of a benchmark meant to represent an entire market. 

Notably, unlike the AI-driven concentration seen in global technology benchmarks, there is little evidence of comparable speculative spillover among ICTSI’s global peers. 

Adani Ports and Shanghai International Port—both larger operators—show no equivalent price behavior. The parabola is local. (Figure 5, lowest images) 

That divergence makes ICTSI’s acceleration even more striking. 

VII. The Intraday Pattern

Figure 6 

Four of the five trading sessions this week followed a recognizable structure: early pumps, momentum that faded or peaked into the close, and pre-close dumps in three of those four sessions. (Figure 6) 

The sequence is not random. Concentrated positions—anchored around largest cap names with broker coordination—set up a strong open. When momentum peaks or the desired level is reached, supply materializes into the closing dump, leaving retail and non-cartel institutional participants on the wrong side of the book. And insiders rearm for the next day’s trade. 

The redistribution dynamic here is straightforward: those who set the opening tone capture the gains; those who follow the signal absorb the unwind. 

The result is similar: headline index strength masks increasingly fragile breadth underneath. 

It is visible in the intraday data with unusual clarity.

VIII. Participation Collapse and Capital Consumption 

Despite repeated modernization initiatives—including digital onboarding, reduced board lots, REIT expansion, market-structure reforms, and other capital-market development programs—active participation in the Philippine equity market has continued to deteriorate.

Figure 7

Active investor participation fell to a record low of 11.8% in 2025. More strikingly, institutional participation did not merely decline in activity; the absolute number of enrolled institutions contracted from 32,284 in 2024 to 29,910 in 2025. (Figure 7, upper pane) 

The participation collapse is not a failure of access. It is a rational response to a market that has repeatedly demonstrated that insiders capture the gains while latecomers absorb the distribution. 

This has broader political-economy implications. 

Sustaining elevated asset prices is not solely about investor confidence or market optics. Equities also function as collateral. Rising share prices support credit expansion directly through pledged securities and indirectly through valuation effects on parallel assets, balance sheets, and spending behavior. 

The reflexive relationship between asset prices and credit expansion is not a side effect of the system. It is one of its central operating mechanisms of fiat systems. 

In this sense, supporting financial asset prices becomes intertwined with a broader economic model dependent on liquidity, leverage, and wealth effects. Policies such as CMEPA, PERA, and related capital-market initiatives reflect this orientation by theoretically channeling savings toward financial assets and expanding the investor base upon which asset-price support depends. 

Instead, what this produces over time is capital consumption disguised as capital formation. Savings intermediated through a distorted pricing mechanism do not necessarily accumulate into productive capital; increasingly, they facilitate redistribution and economic maladjustments. 

The weekly headline performance of the PSEi may communicate one story. Market breadth, volume concentration, and participation trends suggest another. 

Concentration, however, carries its own tradeoffs. 

The more a benchmark depends on a single company, a dominant narrative, or a narrow liquidity channel, the less representative—and potentially more fragile—it becomes. 

When one stock increasingly becomes the market, the benchmark may no longer be signaling broad economic strength. Instead, it may be signaling the progressive narrowing of the channels through which liquidity continues to flow. 

IX. Conclusion: A Late-Cycle Signal 

The PSEi's recent outperformance may say less about broad Philippine corporate strength, the economy and more about the extraordinary influence of a single firm. 

ICTSI's dominance increasingly resembles concentration dynamics observed in other late-cycle markets: narrow leadership, selective liquidity, weakening breadth, and a widening divergence between financial performance and underlying participation. 

The key question is not whether ICTSI can continue to rise indefinitely or even whether its advance can catalyze a broader re-rating across PSEi constituents. Rather, it is whether a benchmark increasingly dependent on a single stock reflects the progressive narrowing of liquidity channels, exposing deeper market, financial, and economic fragilities characteristic of a late-cycle environment. 

A market sustained by increasingly narrow leadership may prove particularly vulnerable to external shocks, especially when global liquidity conditions tighten. The recent crash of Indonesia's JKSE amid mounting currency pressures illustrates how quickly seemingly stable market narratives can unravel once economically sensitive conditions turn less favorable. (Figure 7 lowest diagram)

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But perceptions shift late in the cycle. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold—Doug Noland 

In this issue

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

I. PSEi 30’s Early Start: A Strong Tape — On the Surface

II. Headline Strength vs. Structural Fragility

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance

IV. Breadth and Liquidity: Gains with Caveats

V. Confidence Policy and Market Structure Risk

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities

VII. Conclusion: When Index Strength Outruns Market Health 

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

Index strength masks concentration, policy engineering, and rising geopolitical fragility 

I. PSEi 30’s Early Start: A Strong Tape — On the Surface 

The PSEi 30 closed the week up 2.26%, pushing its 2‑month return to 9.22%—one of the strongest early-year performances in recent years.

Figure 1

The Philippine market appears to be benefiting from abundant global liquidity and rotational flows. Last year’s Asian laggards—Thailand and the Philippines—are now among the top YTD performers, alongside continued momentum in high flyers such as South Korea, Taiwan, Japan, and Singapore. (Figure 1, upper window) 

Yet the strength has emerged despite an “unexpected” Q4 GDP slowdown to 3%. 

In February alone, the PSEi 30 posted a 4.46% MoM and 10.22% YoY gain. (Figure 1, lower table) 

The divergence between slowing output and rising asset prices was not organic—it was liquidity-driven, fueled by foreign inflows and heavy concentration in select index names. 

The tape is strong. The base is narrow. 

II. Headline Strength vs. Structural Fragility 

Cap-weighted indices increasingly function less as barometers of broad market health and more as mirrors of heavyweight concentration. 

This is not unique to the Philippines. The MSCI World Index, for example, is heavily skewed toward the United States and further concentrated in mega-cap technology firms. 

But scale matters. 

In deep, liquid markets, concentration often reflects earnings dominance, structural passive flows, and sustained institutional participation. While representation may be distorted, price discovery remains broadly competitive.

Figure 2

By contrast, in thinner markets, rising concentration is compounded by shallow turnover and limited participation. In such conditions, late-session or post-recess “afternoon delight” flows, along with pre-close (5-minute float) coordinated pump-dumps targeting heavyweight stocks, can exert an outsized influence on index levels. (Figure 2, topmost pane) 

The outcome is not simply greater concentration, but structural fragility — where headline index strength may owe more to liquidity conditions, market microstructure, and political dynamics than to broad-based economic vitality. 

Index gains, therefore, should not automatically be interpreted as evidence of systemic health. 

In shallow markets especially, strength at the top can coexist with weakness underneath. 

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance 

Performance has become increasingly concentrated. 

International Container Terminal Services, Inc. (ICTSI) now dominates index and sector dynamics: 

• Services index: +10.3% MoM, +45.74% YoY, +19.82% YTD (February 2026)
• ICTSI share of services sector volume: 52.35%
• Services sector share of main board value: ~35% 

ICTSI’s weight in the Services Index rose from 55.31% in January to a record 56.4% in February. (Figure 2, middle diagram) 

Its share of main board turnover increased from 15.32% to an all-time high of 18.48%, approaching the 19.8% peak recorded by PLUS during its July melt-up. 

Last February, foreign fund flows accounted for 16% of ICTSI’s total turnover—the highest level since at least October 2025 (Figure 2, lowest graph)

Figure 3

Within the PSEi 30, ICTSI’s weight surged to a record 19.3% on February 25, closing the week at 18.9%, as of February 26th.  (Figure 3, topmost image) 

The top five heavyweights now account for 51.51% of the entire index or five issues comprise more than half of the PSEi 30. 

This means: A 1% move in ICTSI contributes nearly as much to index performance as several smaller constituents combined. 

This is mechanical leverage embedded in construction. 

That is not breadth — it is structural leverage. 

February’s advance saw 20 issues rise, 9 decline, and 1 unchanged, with an average gain of 3.92% — slightly below the 4.46% free-float index gain, illustrating the impact of cap weighting. (Figure 3, middle graph) 

Year-to-date, ICTSI’s +26.23% outperformance has amplified this divergence. Among the top ten stocks (71% of index weight), gains were supported by AC, JFC, MBT, and MER, yet the average gain of the 19 advancing issues was 6.8% — still below the 9.22% index gain. (Figure 3, lowest chart) 

That February and YTD gap is weighting. This is not just concentration. 

It is weight-amplified performance dispersion. 

IV. Breadth and Liquidity: Gains with Caveats

Figure 4

The PSE’s market breadth improved modestly in February, extending January’s gains and helping buoy sentiment for the first time since 2019. (Figure 4, topmost diagram) 

Main board volume rose 16%, marking its second consecutive year of improvement. However, aggregate figures mask internal concentration, with ICTSI absorbing a substantial portion of incremental flows. (Figure 4, middle visual) 

Improvements in breadth have not been proportionately reflected in volume distribution or broader technical structures. 

V. Confidence Policy and Market Structure Risk 

The PSEi bottomed in mid-November 2025 — shortly before the appointment of a prominent tycoon to the Finance Department. (Figure 4, lowest image) 

Prior to this, a three-way energy deal involving SMC, MER, and AEV was announced. 

Subsequently:

• Real Property Taxes (RPTs) were suspended for energy firms.
• GEA-ALL subsidies to renewables were shifted to consumers.
• Banking system net claims on government surged to record highs in December. 

These are not neutral developments.

Figure 5

Expanded fiscal financing through the banking system injects liquidity that can spill into asset markets. (Figure 5, topmost window) 

Support measures for key corporates improve earnings visibility and collateral value. 

Infrastructure and energy subsidies reinforce balance sheet narratives for dominant index constituents. 

San Miguel shares initially led the PSEi 30 higher in Q4 2025 but have since given up more than half of their gains. (Figure 5, middle graph) 

MER and AEV shares joined the shindig along with the PSEi 30. (Figure 5, lowest chart) 

In this context, confidence appears to be a central component of policy transmission—whether through the Bangko Sentral ng Pilipinas or the Department of Finance—aimed at stabilizing sentiment, supporting collateral values, and encouraging distributional effects into GDP. However, confidence-driven liquidity does not eliminate underlying structural fragility, particularly in a concentrated and thin market environment. 

It merely elevates sensitivity to shocks. 

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities 

The renewed outbreak of conflict in the Middle East involving the United States, Israel, and Iran introduces immediate geopolitical risk premia into global markets, with energy serving as the primary transmission channel. 

However, the duration of the conflict matters significantly. A short-lived escalation may generate temporary price spikes, while a prolonged confrontation would embed a more persistent risk premium across commodities and financial assets.

Globally, any credible threat to Iranian production—or worse, disruption of the Strait of Hormuz—could trigger sharp upside volatility in oil prices. Roughly 20% of the global oil supply passes through the Strait of Hormuz.  Even without a physical blockade, elevated risk alone tightens supply expectations and lifts futures curves. 

Higher crude prices would feed into transportation, manufacturing, and electricity costs, raising the probability of a renewed inflation impulse. 

Central banks could face a stagflationary dilemma: tolerate higher inflation or tighten policy into weakening growth. 

Financial markets would likely reflect classic risk-off dynamics—strength in oil and gold, alongside pressure on broad equities, particularly in energy-importing economies. 

For the Philippines, these global effects would be amplified by structural vulnerabilities. As a net oil importer, higher crude prices would directly raise domestic fuel, power, and logistics costs. According to the World Bank, Philippines net imports of energy use amounts to 54% as of 2022. 

This would place upward pressure on CPI and household expenses, further squeezing consumption—the (savings-investment gap) backbone of Philippine GDP. 

It would also increase pressure on debt-financed deficit spending, particularly as fiscal financing partly relies on foreign portfolio and external savings to bridge funding gaps. Higher global rates and a weaker peso could raise borrowing costs and heighten refinancing risks. 

A widening trade deficit driven by higher import bills would likely weaken the peso, reinforcing imported inflation pressures. 

This dynamic complicates policy for the Bangko Sentral ng Pilipinas. Any resurgence in inflation expectations could delay easing or necessitate tighter financial conditions, raising borrowing costs for property, consumer credit, leveraged corporates, and public finance. The resulting environment carries stagflationary characteristics: slower growth combined with sticky prices, increasing duration risk, interest-rate volatility, and credit risk across the financial system and the broader economy. 

As such, equity implications would be uneven—mostly adverse.

Figure 6

Energy and mining shares may respond positively to higher commodity prices, particularly upstream oil and gas producers and exploration firms that directly benefit from rising metal and crude prices. (Figure 6, upper chart) 

The Philippine mining and oil index has already been outperforming and diverging from the PSEi 30, suggesting early sectoral rotation toward commodity-linked exposures. Escalation in the Middle East would likely reinforce this divergence by sustaining risk premia in the gold and energy markets. (Figure 6, lower graph) 

In contrast, downstream refiners, distributors, and power utilities—especially those operating under regulated tariffs or fixed contracts—may face margin compression as input costs rise faster than they can be passed through. 

Transport, logistics, and consumer-facing sectors would similarly come under pressure from elevated fuel and operating expenses, alongside a further erosion of household purchasing power. 

At the macro level, sustained deficit financing in a higher-rate environment could intensify crowding-out effects, as government borrowing absorbs liquidity that might otherwise support private sector investment. Combined with a declining standard of living and rising cost pressures, this raises the risk of credit stress and higher default rates across vulnerable households and leveraged firms. 

An additional layer of vulnerability lies in Overseas Filipino Worker (OFW) remittances. The Middle East remains a major employment hub for Filipino workers. Escalation or regional instability could disrupt employment conditions (estimated 2.2 million OFWs in the Middle East), delay remittance flows, or prompt repatriation risks. While remittances have historically shown resilience even during regional tensions, heightened uncertainty could dampen household confidence and consumption at the margin—particularly when layered onto rising domestic inflation. 

In sum, the conflict raises the probability of a commodity-driven inflation shock superimposed on already liquidity-sensitive markets. 

For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks. 

In such an environment, tactical positioning and selective exposure are likely to be more prudent than broad-based risk allocation. 

VII. Conclusion: When Index Strength Outruns Market Health 

The PSEi 30’s early-year advance is best understood as a liquidity-driven, weight-amplified rally rather than evidence of systemic market strength. With ICTSI alone approaching one-fifth of total index weight and the top five constituents exceeding half of the index, performance has become increasingly mechanical—driven by where liquidity concentrates, not how widely it is distributed. 

This structure matters. In a cap-weighted index operating within a thin market, marginal flows into heavyweight stocks can produce outsized headline gains even as broader conditions remain fragile. 

As geopolitical risks intensify—particularly through energy prices, inflation pressures, and policy constraints—the same index mechanics that amplified the rally could just as easily magnify downside volatility. 

In this context, selective and tactical exposure is more defensible than broad risk allocation. Headline strength may persist, but it should not be mistaken for resilience.

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

 

If you depreciate the money, it makes everything look like it’s going up – Ray Dalio 

In this issue: 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

I. Nota Bene—Data Revision and Structural Divergence

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal

III. The Wile E. Coyote Phase: Optics in Motion

IIIA. Broad-Based Plateauing Across Core Sectors

IIIB. Liquidity Redirected, Not Transmitted

IIIC. The NPL Paradox

IIID. Duration Losses Surface First

IIIE. The Redistribution of Strain

IIIF. Reserve Cuts: Policy Choreography in Motion

IIIG. Late-Cycle Containment

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment 

Stability by Refinancing: The Philippine Banking System Under Containment 

I. Nota Bene—Data Revision and Structural Divergence 

The BSP revised December’s currency-in-circulation growth from 17.7% to 6.4%. This does not alter the central observation: liquidity creation at the monetary authority level continues to exceed the pace of circulation in the broader economy, which highlights the opacity of late-cycle aggregates. The argument herein rests on persistent balance-sheet divergence, or that stability is maintained through optics rather than fundamentals. 

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not 

Liquidity is not only rising — it is accelerating again. Money supply is trending higher. Policy rates have been cut. Reserve requirements have been reduced. Deficit spending has widened toward levels last seen during the pandemic. Yet GDP growth has slowed markedly: Q4 2025 expanded just ~3 percent year-on-year, bringing the full-year growth to ~4.4 percent, the slowest post-pandemic pace outside the crisis period. 

When liquidity expands as output contracts, the question is no longer about stimulus. It is about containment — and about who ultimately absorbs the risk.

Figure 1

In our previous post, we noted that the BSP’s currency issuance — or currency in circulation on the central bank’s books — surged by initially reported ~17.7 percent in December to a historic Php 3.205 trillion (Php 2.897 trillion revised).  (Figure 1, topmost and middle charts) 

In the same month, however, currency outside depository corporations — the stock of cash actually held by the public — grew only ~6.6 percent to Php 2.522 trillion. The gap between issuance (as captured in the Monetary Authorities Survey) and circulation outside banks (as captured in the Depository Corporations Survey) is the widest on record. 

This unprecedented growth differential signals a breakdown in monetary transmission. Liquidity is being created at the central bank level, yet it is not translating into proportional expansion of cash held by the public. Instead, it is accumulating within the banking and sovereign balance-sheet perimeter. 

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage 

Despite the revision, broad money and financial system leverage metrics have pivoted higher. (Figure 1, lowest image) 

Monetary aggregates (M1 and M2) and domestic claims relative to GDP moved back up in Q4, reaching roughly 70.4 percent, 71.8 percent, and 80.6 percent, respectively — levels consistent with tighter financial balance-sheet conditions. 

Domestic claims, which include net claims on the central government (NCoCG) and claims on other sectors, broadly measure credit leverage within the financial system. 

In 2025, lending to the government accounted for ~27.2 percent of total claims (slightly higher than in 2024), while lending to the private sector was ~72.8 percent (slightly lower than in 2024), even as overall claims rose ~10 percent YoY and M1/M2/M3 expanded by 7.1 percent, 7.5 percent, and 7 percent YoY, respectively. 

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction 

Fiscal metrics underscore the scale of backstopping. As of end-November 2025, the national government’s budget deficit reached ~Php 1.26 trillion for the first eleven months — second only to the pandemic year 2020 on a cumulative basis, and representing ~81 percent of the government’s full-year Php 1.56 trillion target. Total revenues rose modestly, while expenditures continued to outpace them, driving the gap. 

Figure 2 

The impact of accelerating liquidity is increasingly visible in financial markets. 

The PSEi 30 has rallied alongside higher turnover despite slowing GDP, while the yield curve has steepened at the front even as long-end yields remain elevated — suggesting that liquidity is facilitating issuance absorption and duration risk transfer rather than signaling stronger real-economy prospects.  PSE & PSEi chart data based on original MAS data. (Figure 2, topmost and second to the highest windows) 

Philippine Treasury market turnover reached record levels in 2025. But volume alone is an incomplete signal of improved confidence. High turnover can reflect repositioning, dealer balance-sheet management, policy alignment, geopolitical shock absorption, or constrained domestic savings with limited real-economy outlets. (Figure 2, second to the lowest image) 

The curve matters more than the prints: its slope embeds term premium, duration appetite, and credibility. (Figure 2, lowest diagram) 

If confidence were broad-based and durable, normalization would occur across tenors. Instead, activity remains selective, slopes unstable, and duration demand cautious—liquidity without conviction. 

Across equities, fixed income, and foreign exchange, the pattern is consistent: liquidity is sustaining financial asset turnover while real-economy transmission weakens 

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal 

The peso tells a similar story. Periodic strength has coincided with weak-dollar phases and sovereign borrowing inflows, yet the underlying savings–investment gap and elevated fiscal financing requirements continue to exert structural pressure. 

The Philippine government raised approximately USD 2.75 billion from global capital markets in January. 

Over the past weeks, USD/PHP has fallen from its record highs to test the 58 level. 

Exchange-rate stability appears less a reflection of external balance improvement than of active liquidity management and capital flow support. 

A key structural signal lies in the growing divergence between the BSP’s Monetary and Financial Statistics (MAS) and the Depository Corporations Survey (DCS). The MAS consolidates the central bank’s balance sheet plus the national government’s monetary accounts, including direct currency issuance and central bank operations. The DCS, by contrast, consolidates the balance sheets of the BSP and all other deposit-taking institutions (commercial banks, thrift banks, rural banks, etc.), presenting money supply and credit aggregates after eliminating intra-system holdings. This methodological difference means the MAS can register rapid currency issuance that does not immediately appear in the broader economy’s cash circulation as captured by the DCS — a gap that has rarely been this wide. 

This divergence — excess monetary creation not translating into commensurate growth in broad money or real economic activity — reflects a balance-sheet recession dynamic, where traditional monetary accommodation fails to circulate through productive economic channels. 

As banks and firms prioritize balance-sheet repair over fresh productive lending, excess liquidity remains trapped within the financial system. Consistent with Hyman Minsky’s financial instability hypothesis and Richard Koo’s balance-sheet recession framework, monetary accommodation increasingly sustains asset turnover and duration/risk transfer rather than output, employment, or external balance improvement. 

III. The Wile E. Coyote Phase: Optics in Motion 

December’s banking data do not depict stabilization. They depict redistribution. 

Slower lending growth emerged despite a string of interest rate cuts — a development even the mainstream press finally acknowledged. 

Universal and commercial bank lending (net of repos) rose 9.2% year-on-year in December — the softest expansion since February 2024’s 8.6%. 

The news pointed to a 5.4% contraction in lending to construction firms, attributing the slowdown to reduced public spending. But construction represents only 3.7% of total bank exposure. It cannot explain system-wide deceleration. 

The drivers were broader — and deeper. 

IIIA. Broad-Based Plateauing Across Core Sectors 

Three major sectors — accounting for roughly 42% of total bank portfolios — drove the slowdown. 

• Manufacturing (8.6% share) contracted 9.43% year-on-year in December, its seventh consecutive monthly decline and the second-deepest contraction since September 2025’s 10.44% drop. 
• Real estate (≈20% share) — the system’s largest borrower — slowed to 8.3% growth, its weakest pace since October 2023. 
• Consumer lending (13.5% share) — previously the fastest-growing segment — decelerated to 21.4%, the slowest since September 2022. This follows an extraordinary 33-month streak of growth exceeding 22%. 

This is not marginal noise.

Figure 3

Credit expansion appears to be plateauing across its core engines, as bank lending to both the production sector and households shows signs of inflection. (Figure 3, topmost pane) 

Meanwhile, GDP growth has slowed for two consecutive quarters — from 3.95% in Q3 to 3% in Q4. (Figure 3, middle image) 

Rate cuts were marketed as stimulus. Yet lending momentum peaked as output weakened. 

IIIB. Liquidity Redirected, Not Transmitted 

As lending to the general economy softened, activity within the financial system intensified.

Interbank lending and reverse repurchase transactions (with both the BSP and other banks) surged toward milestone highs. (Figure 3, lowest graph)

Figure 4

Bank borrowings from capital markets jumped 17.3% to an all-time high of Php 1.96 trillion, largely reflecting bond positioning. Bills payable also rose to one of the highest levels on record. (Figure 4, top and second to the highest images) 

Net claims on the central government increased 10.8% to a fresh record of Php 6.135 trillion. Duration exposure deepened. (Figure 4, second to the lowest diagram) 

Yet Held-to-Maturity (HTM) securities increased only modestly (+1.2% YoY), despite the BSP’s reclassification of these instruments under “debt securities net of amortization.” 

Risk did not disappear — it moved.

Despite liquidity injections, bank cash balances contracted 19.5% year-on-year in December.

Cash-to-deposit and liquid-asset-to-deposit ratios improved slightly but remain strategically low. (Figure 4, lowest visual) 

System liquidity appears abundant in headline aggregates. 

At the transactional margin, it is thin.

IIIC. The NPL Paradox

Figure 5 

Non-performing loans had been rising alongside slowing GDP through Q3. 

In November, they softened modestly. In December, they fell sharply. (Figure 5, topmost and middle graphs) 

Gross NPLs declined in peso terms — not merely as a ratio effect — even as output had weakened for two consecutive quarters. While year-end charge-offs, restructurings, and classification adjustments can produce seasonal improvements, the magnitude of the drop contrasts with deteriorating macro conditions. 

Either borrowers experienced an abrupt recovery amid a slowdown — or recognition dynamics shifted. 

There are only a handful of mechanical pathways through which NPL ratios decline in such an environment:

• Restructurings
• Charge-offs
• Denominator expansion
• Regulatory relief
• Classification effects 

The burden of proof shifts to fundamentals. 

IIID. Duration Losses Surface First 

While credit metrics improved optically, market losses intensified. 

In December, Available-for-Sale (AFS) securities expanded 22% and now account for roughly 45% of financial assets, rapidly approaching Held-to-Maturity’s 48% share. (Figure 5, lowest chart)

Figure 6

Despite generally easing Treasury yields, financial investment (accumulated) losses surged in December from Php 1.98 billion in November to Php 20.16 billion. (Figure 6, topmost pane) 

For Q4, losses on financial assets reached Php 42.396 billion — the third consecutive quarter exceeding Php 40 billion — levels previously seen only during the pandemic recession. (Figure 6, middle diagram) 

Full-year 2025 financial asset losses totaled Php 159.7 billion, materially weighing on profitability. Banking system net income growth slowed sharply: Q4 net income declined 0.78% year-on-year, while full-year 2025 profit growth decelerated to 3%, down from 9.8% in 2024. 

From Q3 to Q4, return on assets (ROA) decreased from 1.46% to 1.41%, and return on equity (ROE) declined from 11.71% to 11.46%, suggesting both measures may be beginning to trend downward. (Figure 6, lowest chart) 

The pressure came less from exploding credit costs than from market volatility. This is not synchronized improvement. It is stress migration.

IIIE. The Redistribution of Strain 

When securities losses rise, repo dependence increases, sovereign absorption intensifies, liquidity buffers remain fragile — yet NPL metrics improve abruptly — the pattern is not stabilization.

It is reallocation. 

Late-cycle systems often preserve surface calm by shifting where strain appears:

• Duration losses surface before credit losses.
• Market volatility compresses earnings before defaults spike.
• Provisioning pressure eases as classifications adjust.
• Headline ratios improve even as balance sheets stretch. 

This is the AFS Wile E. Coyote dynamic accelerating. The system appears suspended — supported by liquidity, refinancing structures, sovereign absorption, and accounting elasticity — even as underlying cash-flow conditions soften. 

Stability is maintained through motion, not repair.

IIIF. Reserve Cuts: Policy Choreography in Motion 

In February 2026, the BSP cut reserve requirements across bank-issued bonds, mortgage instruments, and trust accounts. Reserves on bonds fell from 3% to 2% for universal and commercial banks; thrift banks saw their 6% requirement scrapped; long-term negotiable deposits lost their 4% ratio; and most strikingly, trust and fiduciary accounts dropped to zero from double-digit levels. 

The BSP framed the move as liquidity-neutral, but the timing betrays intent: this was balance-sheet relief, not growth. Banks absorbing securities losses, repo dependence, and sovereign absorption were granted regulatory breathing room. 

This is choreography, not repair. Reserve cuts thin liquidity buffers to ease optics, shifting fragility from bank balance sheets into the broader system. Once again, containment through redistribution, not stabilization. 

IIIG. Late-Cycle Containment 

This pattern aligns with Minsky’s late-cycle stabilization phase: fragility becomes politically and financially intolerable, prompting increasingly active management of volatility and balance-sheet optics. Stability is no longer organic — it is administered. 

It also echoes Kindleberger’s late-cycle dynamics, where imbalances are contained and recognition deferred. Transparency thins. Risk redistributes. The system appears calm — until price signals overwhelm narrative control. 

It resembles Kornai’s soft-budget constraint dynamic: losses are socialized, recognition deferred, discipline diluted. 

The system is being managed. 

But when liquidity sustains refinancing more than output, when duration risk migrates faster than credit risk, and when monetary aggregates expand faster than money circulating in the real economy, the adjustment rarely announces itself through ratios.  

It accumulates quietly on balance sheets. Then it emerges through prices — often abruptly. 

And economics does not yield to optics.  

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

Figure 7

The Philippine financial system is highly concentrated. Banks control roughly 83.1% of total financial assets, with universal and commercial banks accounting for about 77.4% (as of December 2025). (Figure 7, upper chart) 

At the same time, the PSEi 30 is itself concentrated in a handful of large-cap names. 

Since 2024, the top five heavyweights have accounted for over 50% of the index weight. This concentration has been led by ICTSI, which not only surpassed former leader SM Investments but, through a string of record highs, has pushed its weight in the PSEi 30 to over 18%— a single issue now accounts for nearly one-fifth of the headline index’s performance! (Figure 7, lower graph) 

In such an environment, late-session flows (“afternoon delight” or “pre-closing” activity) into a small number of index-heavy stocks can have disproportionate effects on headline market performance. Whether driven by liquidity management, portfolio rebalancing, balance-sheet considerations, or index performance objectives, this clustering of activity near the close raises questions about the quality and integrity of price discovery. 

This is not merely a capital markets issue. 

When asset prices become reference points for macro stability—and when large financial institutions sit at the center of both credit creation and market intermediation—price management, volatility smoothing, and liquidity containment can feed back into balance sheets. 

The result is a reflexive loop: 

• Market stabilization supports balance-sheet optics.
• Balance-sheet stability reinforces the narrative of macro resilience.

But when stabilization becomes a policy objective—whether in equity indices, exchange rates, or the yield curve—intertemporal trade-offs accumulate. 

Those trade-offs do not disappear. They re-emerge in funding structures, duration exposure, and income volatility—and ultimately in market volatility. 

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

What we are observing is not a conventional stimulus cycle. It is a containment cycle. 

• Liquidity is growing — but circulation is narrowing.
• Credit is refinancing — but not compounding productive output.
• Market turnover is rising — even as real growth decelerates. 

This is consistent with the balance-sheet recession dynamic outlined previously: private sector caution meets public sector duration absorption, while monetary aggregates expand within the institutional perimeter. 

In such a regime, risk does not disappear. It migrates. 

• Credit risk becomes duration risk.
• NPL ratios improve through denominator expansion.
• Volatility compresses through active management. 

But arithmetic remains.

When liquidity sustains rollover more than real investment, growth slows even as balance sheets expand. And when duration risk concentrates faster than income growth, the system becomes increasingly sensitive to price signals rather than flow indicators. 

The adjustment, when it comes, is rarely triggered by one dramatic data release. It emerges when price discovery outpaces narrative control. 

That is late-cycle dynamics. 

Policy stimulus eventually fails not because liquidity stops expanding — but because the real capital base can no longer validate the financial claims built upon it. 

Narratives may shape perception, but only economics compounds 

____

Reference: 

Prudent Investor Newsletter, Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown, Substack, February 08, 2026