Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

 

Deficits are always a spending problem, because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increased every year—Daniel Lacalle

In this issue

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect?

V. Record 10-Month Expenditure: The Push for "Big Government"

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

VII. Rising Foreign Denominated Debt Payments!

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

IX. Q3 2024: Public Debt to GDP rises to 61.3%

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status 

Improvements in the 10-month fiscal balance have fueled the Philippine government’s unrealistic fixation on achieving 'Upper Middle Income' status—here's why. 

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints 

Inquirer.net, November 28: A double-digit revenue growth helped swing the government’s budget position back to a surplus in October, keeping the 10-month fiscal deficit below the 2024 ceiling set by the Marcos administration. The government ran a budget surplus of P6.3 billion in October, a reversal from the P34.4- billion deficit recorded a year ago, figures from the latest cash operations report of the Bureau of the Treasury (BTr) showed. 

Most media outlets barely mention that recent changes in tax collection schedules have distorted the Bureau of the Treasury’s reporting data. 

As noted in September, these adjustments significantly impact the perception of fiscal performance. 

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. 

Therefore, we should anticipate either a surplus or a narrower deficit this October. (Prudent Investor, October 2024)

Figure 1 

For instance, October’s surplus of Php 6.34 billion underscores how the quarterly revenue cycle boosts collections at the start of every quarter, often leading to either a surplus or a narrowed deficit. Surpluses were observed in January, April, and October this year. (Figure 1, topmost chart) 

However, as the government pushes to meet its year-end 'budget execution' targets in December, a significant spike in the year-end deficit could emerge from the remaining spending balance. 

Based on the budget allocation for 2024 amounting to Php 5.768 trillion, the unspent difference from the ten-month spending of Php 4.73 trillion is Php 1.038 trillion. 

Notably, in contrast to previous years, 2024 has already experienced three months of public spending exceeding Php 500 billion, with December still underway. (Figure 1, middle image) 

On the other hand, this could indicate a potential frontloading of funds to meet year-end targets. 

While spending excesses are constrained by law, the government has consistently exceeded enacted budget allocations since 2019. (Figure 1, lowest diagram) 

Consequently, this trend, shaped by political path dependency, suggests that the remaining Php 1.038 trillion could likely be surpassed. 

According to the Department of Budget and Management (DBM), budget adjustments are permissible under specific conditions: (DBM, 2012) 

1.    Enactment of new laws,

2.    Adjustments to macroeconomic parameters, and

3.    Changes in resource availability. 

These provisions may provide political rationales to justify increases in the allocated budget.

Figure 2

Expenditures, while down from last month, remain within their growth trajectory, while revenues have so far outperformed expectations. (Figure 2, topmost graph)

Despite October’s 22.6% revenue growth contributing to a lower ten-month deficit—down from Php 1.018 trillion in 2023 to Php 963.9 billion—it remains the fourth largest on record.

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

What is seldom mentioned by mainstream media is that such deficits serve as "fiscal or automatic stabilizers," ostensibly for contingent or emergency (recession) purposes.

While authorities repeatedly propagate their intent to elevate the economy to "upper middle-income" status and attain a credit "A" rating soon, they fail to disclose that current political-economic conditions are still functioning under or reflect continued reliance on a "stimulus" framework.

In fact, as we keep pointing out, the Bangko Sentral ng Pilipinas (BSP)’s reserve requirement ratio (RRR) and interest rate cuts represent monetary measures, while authorities have ramped up fiscal measures or "Marcos-nomics stimulus" for their political agenda—namely, pre-election spending and a subtle shift toward a war economy, alongside centralization through increased public spending and an enlarged bureaucracy or "Big Government."

Finally, while expenditures adhere to programmed allocations and revenues fluctuate based on economic and financial conditions as well as administrative efforts, they remain inherently volatile.

Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond.

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout.

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability.

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

Let us now examine the details.

In October, public revenue surged by 22.6%, driven primarily by a 16.94% growth in tax revenues, with the Bureau of Internal Revenue (BIR) contributing 16.19% and the Bureau of Customs (BOC) 11.5%. Meanwhile, non-tax revenues soared by 87.7%, largely due to revenues from other offices, including "privatization proceeds, fees and charges, and grants."

These activities boosted the 10-month revenue growth from 9.4% in 2023 to 16.8% this year, largely driven by a broad-based increase, largely powered by non-tax revenues.

It is worth noting that, despite reaching a record high in pesos, the BIR’s net income and profit growth significantly softened to 8.3%, the lowest since 2021, remaining consistent with the 9-month growth rate.  This segment accounted for 50% of the BIR’s total intake. (Figure 2, middle pane)

In contrast, sales taxes jumped by 30.6% over the first 10 months, marking the highest growth rate since at least 2017, and represents 30% of the BIR’s total revenues. Sales taxes vaulted by 31.6% in the first 9 months. (Figure 2, lowest chart)

The reason for focusing on the 9-month performance is to compare its growth rate with that of the PSEi 30, allowing for a closer understanding or providing a closer approximation of the BIR's topline performance.

Figure 3

Unfortunately, when using same-year data, the PSEi 30 reported a 9-month revenue growth of 8.1%, the slowest since 2021. This pattern is echoed in its net income growth of 6.8%, which is also the most sluggish rate since 2021. (Figure 3 upper window) 

To put this in perspective, as previously discussed, the 9-month aggregate revenues of the PSEi 30 represent approximately 27.9% of the nominal gross domestic product (NGDP) for the same period. 

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect? 

In its September disclosure, the Bureau of the Treasury cited changes in the VAT schedule as a key factor boosting tax collections: " The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return" (Bureau of Treasury, October 2024) [bold added] 

Once again, the adjustment in VAT schedules played a pivotal role in increasing revenues, helping to reduce the deficit and debt—a topic we discussed in September 2024 (Prudent Investor, September 2024). 

Or, whether by design or as an unintended consequence, a critical factor in the slower deficit has been a shift in government tax collection and accounting procedures. 

But what will happen if, under the same economic conditions or with only slight improvements, the effects of such transient changes wear off? Will the deficit soar again? 

Moreover, it is important to note that all this is occurring while bank credit expansion and public debt are at record highs. 

What will happen to credit and liquidity-fueled demand once household and corporate balance sheets become saturated with leverage? 

It’s also noteworthy that, even as the share of revenue to nominal GDP (NGDP) reached its highest level in Q2 and Q3 of 2024, real GDP continues its downward trend—a dynamic that has persisted since 2016 and reemerged in 2021. (Figure 3, below graph) 

Are these not symptoms of the "crowding-out effect," where the increasing share of government interventions, measured by expenditures, debt, and deficits, translates into diminished savings and capital available for private sector investments? 

V. Record 10-Month Expenditure: The Push for "Big Government" 

But what about expenditures? 

Local Government Unit (LGU) spending surged by 11.97%, and national disbursement growth reached 14.3%, powering an overall increase in October expenditures of 11.1%. Interest payments, on the other hand, fell by 6.1%. The former and the latter two accounted for shares of 18.1%, 66.64%, and 11.9% of the total, respectively.

For the first 10 months of the year, expenditures grew by 11.5%, reaching a record-high Php 4.73 trillion, driven by LGU spending, National disbursements, and interest payments, which posted growth rates of 9.1%, 11.9%, and 23.03%, respectively.

As noted above, these record expenditures are primarily focused on promoting political agendas: pre-elections, a subtle shift towards a war economy, and an emphasis on centralization through infrastructure, welfare, and bureaucratic outlays.

Figure 4

One notable item has played a considerable role: 10-month interest payments not only outperformed other components in terms of growth but also reached a record high in peso terms. (Figure 4, topmost graph) 

Additionally, their share of total expenditures rose to levels last seen in 2009. 

That said, the ratio of expenditures to NGDP remains at 23.98% in Q2 and Q3 and has stayed within the range of 22% to 26%—except for two occasions—since Q2 2020. (Figure 4, middle chart) 

Over the past 18 quarters, this ratio has averaged 23.4%. 

As mentioned above, despite all the hype about achieving "upper middle income" status and attaining a "Class A" credit rating, the Philippines continues to operate under a fiscal stimulus framework, which has only intensified with recent policies which I dubbed as "Marcos-nomics stimulus."

In the timeless words of the distinguished economist Milton Friedman, "Nothing is so permanent as a temporary government program."

Current conditions also validate the "Big Government" theory articulated by the economist Robert Higgs, particularly regarding what he termed "The Ratchet Effect." This concept refers to the "tendency of governments to respond to crises by implementing new policies, regulations, and laws that significantly enhance their powers. These measures are typically presented as temporary solutions to address specific problems. However, in history, these measures often outlast their intended purpose and become a permanent part of the legal landscape." (Matulef, 2023)

The push towards "Big Government" is evident, with approximately a quarter of the statistical economy deriving from direct government expenditures.

This figure does not include the indirect contributions from private sector participation in government activities, such as public-private partnerships (PPPs), suppliers, outsourcing and etc. 

As a caveat, the revenue and expenditure-to-NGDP ratio is derived from public revenue and spending data and nominal GDP—an aggregate measure where government spending is calculated differently—potentially leading to skewed interpretations of its relative size. 

In any case, as the government grows, so too does its demand for resources and finances—all at the expense of the private sector, particularly micro, small, and medium enterprises (MSMEs), as well as the purchasing power of the average Filipinos, represented here as Pedros and Marias. 

While government fiscal health may provide some insights into its size, there are numerous hidden or immeasurable costs associated with its expansion: compliance costs, public sector inefficiencies, regulatory and administrative burdens, policy uncertainty, moral hazard, opportunity costs, reduced incentives for innovation, deadweight losses, productivity costs, economic distortions, social and psychological costs, and more.

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

Rising interest payments represent some of the symptoms of "Big Government."

What’s remarkable is that, in just the first 10 months of 2024, the cost of servicing debt (amortization plus interest) soared to an all-time high of Php 1.86 trillion—16% higher than the previous annual record of Php 1.603 trillion set in 2023. And there are still two months to go! (Figure 4, lowest visual)

Amortization and interest payments exceeded their 2023 annual figures by 25.3% and 1.65%, respectively. 

Notably, amortization payments surged by a staggering 760% in October alone, reaching Php 161.5 billion.

As a result, amortization and interest payments have already surpassed their full-year 2023 totals. However, because the government categorizes amortizations (or principal payments) as financing rather than expenditures, they are not included in the budget.

VII. Rising Foreign Denominated Debt Payments!

There's more to consider.

Figure 5

Payments (amortization + interest) on foreign-denominated debt in the first 10 months of 2024 increased by 52%, reaching a record high. This brought their share of total payments to 21.9%, the highest since 2021. (Figure 5, topmost chart)

Unsurprisingly, the government borrowed USD 2.5 billion in the end of August, likely to refinance existing obligations. Adding to this, authorities reportedly secured another $500 million loan from the Asian Development Bank last week in the name of "climate financing."

Nonetheless, these serve as circumstantial evidence of increased borrowing to fund gaps, reflecting the "synthetic dollar short" position discussed last week.

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

Here’s where mainstream narratives often place emphasis: a slower deficit translates into slower growth in public debt. (Figure 5, middle graph)

In other words, a decrease in financing requirements or a reduction in the rate of increase in public debt decreases the debt/GDP ratio.

Authorities are scheduled to announce public debt data next week.

The apparent gaslighting of fiscal health suggests that authorities are employing tactical measures to improve macroeconomic indicators temporarily. These efforts seem aimed at buying time, likely in the hope that the economy will gain sufficient traction to mask structural weaknesses.

Still, while public debt continues to rise—albeit at a slower pace—bank financing of public debt through net claims on the central government (NCoCG), which began in 2015, appears to have temporarily plateaued. At the same time, the BSP's direct financing of the national government seems to have stalled. (Figure 5, lowest image)

However, none of these emergency measures have reverted to pre-pandemic levels.

The government shows no indication of weaning itself off the stimulus teats.

IX. Q3 2024: Public Debt to GDP rises to 61.3%

Unfortunately, the record savings-investment gap underscores a troubling reality: the GDP is increasingly propped up by debt.

While mainstream narratives highlight the prospect of a lower public debt-to-GDP ratio, they often fail to mention that public debt does not exist in isolation.

In the aftermath of the Asian Financial Crisis, the Philippine economy underwent a cleansing of its balance sheet, which had been marred by years of malinvestment. When the Great Financial Crisis struck in 2007-2008, the Philippine economy rebounded, aided by the national government’s automatic stabilizers and the BSP's easing measures.

However, during that period, the BSP mirrored the Federal Reserve's policy playbook, prompting the private sector to absorb much of the increased borrowing. This reduced the economy’s reliance on deficit-financed government spending and shifted the debt burden from the public to the private sector, enabling a decline in the public debt-to-GDP ratio.

Today, however, this is no longer the case.

Figure 6

Following the pandemic-induced recession, where bank credit expansion slowed, the government stepped in to take the reins, driving public debt-to-GDP to surge. As of Q3, it remained at 61.3%—the second highest level since 2021’s peak of 62.6% and the highest since 2004. 

Currently, despite high-interest rate levels, both public borrowing and universal commercial bank lending have been in full swing—resulting in a systemic leverage ratio (public debt plus universal commercial bank credit) reaching 108.5% of nominal GDP in 2023. 

This means that the government, large corporations, and many households with access to the banking system are increasingly buried in debt.  

In any case, debt is perceived by consensus as a "free lunch," so you hardly ever hear them talk about it. 

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

In conclusion, while current fiscal metrics may appear to show surface-level improvements, the government remains addicted to various free-lunch policies characterized by easy money stimulus. 

The government and elites will likely continue to push for a credit-driven savings-investment gap to propel GDP growth, leading to further increases in debt levels and necessitating constant liquidity infusions that heighten inflation risks. 

The establishment tend to overlook the crowding-out effects stemming from government spending (and centralization of the economy), which contribute to embedding of the "twin deficits" that require more foreign financing—ultimately resulting in a structurally weaker economy. 

The relentless pursuit of "upper middle income" status resembles a futile obsession—a "wet dream" driven more by the establishment’s obsession with benchmarks manifesting social signaling than substantive progress. 

For distributional reasons (among many others), the GDP growth narrative does not reflect the true state of the economy. 

Persistent self-rated poverty and hunger, widening inequality, elevated vacancies in the real estate sector, low savings rates, and stagnating productivity are clear indicators that GDP number benefits a select few at the expense of many. This, despite debt levels soaring to historic highs with no signs of slowing. 

Even the Philippine Statistics Authority’s (PSA) per capita consumer and headline GDP trendlines contradict the notion of an imminent economic or credit rating upgrade. 

While having the U.S. as a geopolitical ally could offer some support in the pursuit of cheaper credit through a potential credit upgrade, it is important to acknowledge that actions have consequences—meaning the era of political 'free lunches' are numbered. 

And do authorities genuinely believe they can attain an economic upgrade through mere technical adjustments of tax schedules and dubious accounting practices, akin to the "afternoon delight" and 5-minute "pre-closing pumps" at the PSEi 30? 

Yet because the political elites benefit from it, trends in motion tend to stay in motion, until… 

___

References 

Prudent Investor, September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso October 28, 2024 

Department of Budget and Management, THE BUDGETING PROCESS, March 2012, dbm.gov.ph

Bureau of Treasury, September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024, treasury.gov.ph

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024

Michael Matulef Beyond Crisis: The Ratchet Effect and the Erosion of Liberty, August 18, 2023, Mises.org

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

 

Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses—Daniel Lacalle

 

In this issue

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

In 2023, Philippine deficit spending remains in a "stimulus mode."  Yet risks continue to mount as the adverse impact from rising debt, debt servicing, and the crowding effect spreads. 

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

 

Inquirer.net, March 1 2024: The government’s budget deficit hit P1.512 trillion in 2023, 6.32 percent smaller than the shortfall recorded in 2022 but overshot the target of P1.499 trillion, according to data released on Thursday by the Bureau of the Treasury. This meant that last year’s fiscal gap, as a share of the country’s gross domestic product, stood at 6.2 percent, significantly narrower than the 7.3-percent ratio in 2022, but slightly above the Marcos administration’s deficit cap of 6.1 percent for 2023…Explaining the latest outturn, the Treasury said the smaller year-on-year deficit demonstrates “progress of fiscal consolidation.”

 

Here is what the media didn't say (other media outlets also silent on this). 

 

Though they cited the 2023 outcome relative to the targets, they missed explaining how the deficit breached the government's goals.

Figure 1

 

Pointedly, public spending and fiscal deficit (in peso) hit all-time highs in December!   All. Time.  Highs. (Figure 1, topmost chart)

 

In percentage, public spending numbers looked unimpressive.  It grew by only 2.24% in December, 1.71% in Q4, and 3.42% in 2023.  But statistics can be deceiving.  The reason for this is the "high" base effects!  This year's December record expenditures of Php 661 billion took the tiara from December 2022’s Php 646.6 billion.

 

But how about revenues?

 

Revenues contributed less to the 2023 deficit.  

 

Revenue growth contracted by 3.03% in December, grew by 11.05% in Q4, and 7.9% in 2023 to a record Php 3.824 trillion. (Figure 1, middle window)

 

Briefly, public spending has become the primary determinant of the balance sheet health of the Philippine government!  

 

Its relentless growth brings to the fore some burning questions:

 

-Is the Philippine economy in trouble to require an acceleration of "fiscal stabilizers?"

 

-How could Treasury officials describe this as "fiscal consolidation" when the deficit-to-GDP remains in highly accommodative "stimulus" mode? (Figure 1, lowest graph)

 

Figure 2

 

-Why does the BSP call its actions "tightening" when public debt skyrocketed to a fresh record of Php 14.79 trillion in January 2024? (Figure 2, topmost diagram)

 

-Or is it just the addiction to free lunch politics for the government?

 

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

 

The share of government expenditures (ex-construction) to the NGDP was at 14.2% in 2023.

 

However, using the same Bureau of Treasury (BoTr) data to get the 6.2% debt-to-NGDP, public spending-to-NGDP jumped to 22% in 2023! 

 

So, which is accurate, the PSA's GDP data or the BoTr? Or is the government using an apples-to-oranges comparison to sugarcoat actual conditions?

 

Yet the mainstream impulse has been to ignore or discount the cost of government deficit spending to the (real) economy.

 

With its growing role, the carrying cost of the mounting debt levels represents a major negative factor. 

 

The thing is, an expansive government, the higher the debt load.  Higher debt levels, which weigh on the economy, increase various risk factors covering a wide swath of society (economic, financial, social, and political).

 

In 2023, aside from national expenditures, whose % share expanded from 63.5% to 66.7%, interest payments also soared from 9.75% to 11.8%. (Figure 2, middle pane)

 

While the BoTr data apportions interest payments in the expenditure data, it does not specify its treatment on amortizations. 

 

Nevertheless, total public debt reached a record Php 14.62 trillion in 2023, while debt servicing (interest + amortization) costs surged to an unprecedented Php 1.603 trillion.  (Figure 2, lowest graph)

Figure 3

 

The share of debt servicing has been rising in the context of the budget, viz., revenues (45%) and expenditures (30%) in 2023. (Figure 3, topmost chart)

 

Since bottoming in 2019, the debt onus has started to climb and accelerated in 2023.

 

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

 

That's not all. 

 

"This time is different." So they say.

 

While we are no fan of comparing public debt to GDP because of its crucial flaws, after a historic 62.6% in 2021, debt-to-GDP in 2023 was at 60.2%—the third highest! 

 

In the meantime, debt servicing to GDP has swiftly been closing to its 2011 highs!

 

Please note that both variables are HIGHER than the pre-1997 Asian Crisis levels—where debt and debt servicing to GDP exploded when the denominator (GDP) shrank. (Figure 3, middle graph)

 

While debt levels have been constantly rising, a sudden or precipitate slowdown in the GDP (or a recession) would push these ratios to unseen levels!

 

Add to this conditions that debt-financed public spending accounts for about a fifth to a quarter of the GDP—which excludes private sector resources and finances committed to public projects—meaning the economy has transformed into increasing dependence on big government.

 

This fact disputes all purported actions intended supposedly to liberalize the economy, e.g. economic cha-cha.

 

Yet, the debt amortizations—possibly including the unsustainable military pensions—continue to grab a larger share of overall debt payments. But most of the time, public’s attention has been directed towards interest payments alone.

 

That's right. 

 

Statistical opacity may have disguised the actual leveraged conditions of the Philippine balance sheet.   The widening gap between Philippine debt levels and public spending exhibits this likely anomaly. 

 

Yes, the rolling over of public debt may be one of the contributors, but this does not account for the black hole in amortizations.

 

2023 reinforced the uptrend in the share of amortization and the downtrend in interest payments, which accounted for a 60:40 distribution ratio. (Figure 3, lowest diagram)

 

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

 

Unlike mainstream wisdom, debt levels don't melt away.  Everything is interconnected.  Public debt is entwined with the financial system and the political economy.

 

The previous decline in public debt to GDP (2009-2019) was a function of financial juggling. 

 

While public spending rose marginally (compared to the present), bank credit substituted for economic financing.  Or, growth financed by bank credit expansion filled the Philippine treasury's coffers. 

 

In 2020, the government shifted from relying on bank credit expansion to public spending to support the GDP.   The pandemic recession amplified this shift, where public debt financing reasserted its dominance.

Figure 4

 

Overall, systemic leveraging (public and Universal and Commercial bank credit) has been cumulative and accounted for a staggering 109% of the GDP in 2023! (Figure 4, topmost graph) The numbers exclude informal debt. 

 

Except for the slowdown in 2009-2010 and 2012-2014, which represented noise, the uptrend in systemic leverage exploded in 2020. 

 

The ramification of the collaboration to inject liquidity by the BSP and its banking cartel was a massive expansion in leverage.

 

The concerted efforts of the BSP and the banks (as well as other financial institutions) resulted in the unparalleled monetization of public debt (net claims on central government or NCoCG) intended to keep the system afloat in liquidity and support collateral values that backed the financial industry's leverage or loans.  (Figure 4, middle chart)

 

Aside from repos, the BSP recently included "BSP Securities" (short-term bills) to augment bank liquidity operations.  Bank credit expansion and these combined operations boosted the money supply levels to historic proportions.

 

As further proof, money supply growth from the BSP and the banking system has entirely financed the record deficits (and debt amortization).  

 

M3-to-GDP rocketed to an all-time high of 79% in 2021, and despite the recent slide, it still accounted for a whopping 72% in 2023! (Figure 4, lowest window)

 

As a stand-alone metric, debt-to-GDP doesn't capture such interrelationships and its attendant risks.

 

Behind the buoyant GDP and other macro indicators lies a Pandora's Box of disguised risks.

 

As Austrian economist Peter St. Onge recently tweeted, "Statistics aren't designed to inform, they're designed to hide the truth."

 

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

 

There is also the crowding out effect. 

 

The government doesn't create wealth.  It is funded by taxing its constituents.  Or, since the government taxes, borrows (future taxes), or resorts to inflation to fund its consumption, this constrains the finances and resources of the private sector—the crowding out effect. 

 

Yes, the government sells some of its consumption activities as "investments," even though they limit the role of the marketplace, which distorts "returns" and increases economic misallocations.

 

Besides, because there is no market price for government functions, such as police, etc., economic calculation barely exists.

 

What's more, popular themes and implicit agendas of the political leaders determine political actions and policies rather than P/L statements.

 

A reduction in production is a repercussion of the "crowding out effect," or when the government competes with the private sector for resources, which leads to increasing dependence on imports.

 

A colossal transformation in the banking system has augmented this structural shift towards record deficit spending: the metamorphosis towards consumer credit. 

 

It is no surprise that record trade deficits have accommodated these monumental developments.

Figure 5

 

The TWIN DEFICITS translate to a splurge in spending or overspending to boost the GDP funded by household savings and external borrowing.  (Figure 5, topmost graph)

 

The Philippine economic model embodies the Keynesian framework of (indiscriminate debt funded) spending to achieve prosperity.

 

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

 

Instead of utopia, we witnessing a boom-bust cycle in motion.

 

Another consequence of the increasing dependence on the leviathan is the crowding out of liquidity—as the government competes with the financial industry and non-financial enterprises for access to household savings. 

 

The banking system's decaying cash-to-deposits have corresponded with the swelling of the fiscal deficits.  The deteriorating ratio is a function of decreasing cash and deposit growth rate. (Figure 5, middle image)

 

The drain in household savings translates to reduced investment capacity from local investors.  This shortfall extrapolates to increasing dependence on FDIs, meaning the domestic economy becomes more sensitive to global developments.

 

However, debt flows have comprised the majority of Philippine FDIs, which comprised an average of 68.5% from January to November 2023, which could mean bridge financing than new investments. (Figure 5, lowest chart)

Figure 6

 

As evidence of savings shortfall, the deteriorating peso volume of the PSE correlates with the enlarged budget deficit. (Figure 6, topmost illustration)

 

The BSP’s external debt levels have also risen in tandem with the deficit-to-GDP ratio, which underscores the increasing dependence on foreign savers. (Figure 6, middle graph)

 

Remember, someone has to fund such spending binges!

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

Finally, with the government reducing savings and investments, it would be natural to expect a decline in the private sector's household sector's consumption. (Figure 6, lowest diagram)

 

At present, the supposed interim trend "recovery" in per capita household spending reflects the outsized growth in bank consumer loans rather than productivity growth.  

Figure 7

 

Mounting leverage of one's balance sheet also pulls forward future consumption.  The spike in public debt per capita also led to reduced (private sector) liquidity and diminished consumption—as more resources are diverted to debt servicing. (Figure 7, topmost visual)

 

Declining production, increasing dependence on imports (contributes to the weakening peso), and record liquidity expansion have combined to push higher demand, therefore, the uptrend in the CPI (inflation) cycle, which also contributes to the decrease of the consumer's purchasing power. (Figure 7, middle image)

 

So even with the employment rates reportedly hitting a record high last December, consumers have reported reduced spending growth rates!  Ironic, right?

VIII. The BSP as the Keyman Role for Deficit Financing, The Erosion of Fiscal Latitude

 

Government spending also redistributes financial and economic resources to those allied, affiliated, popular demands of the moment, logrolling, underhanded deals, by coercion, or to preferred political subjects (patronage politics). 

 

Once again, this means increased misallocations, concealed losses, and the erosion of productivity, which result in a massive pileup of deficits, exacerbating corrosion in savings and purchasing power and the increased use of leveraging to disguise risks.

 

Widening inequality is a consequence of such political redistribution—favoring political agents and politically connected entities at the expense of the population.

 

Of course, the BSP assumes a principal role in the massive growth in the imbalances in fiscal, trade resource allocation, and credit buildup.

 

Despite the growth in public debt, the BSP’s low rates regime accommodated the decline in general debt servicing costs (2008-2019). (Figure 7, lowest chart)

 

Yet, rising rates have failed to contain the massive debt growth, which, along with its increasing stock, has caused debt servicing costs to spike to record levels in 2023.

 

Could a third wave of inflation translate to a "game over" for the addiction to financial and monetary leveraging?

 

Not only private sector credit bubbles, the BSP's easy money regime feeds on political boondoggles—responsible for the present and upcoming intensifying growth in twin deficits and their associated risks in the financial system, political economy, and social order.

 

In summary, unlike the US, which has been privileged with the "exorbitant privilege" or the de facto reserve currency of the world, the Philippines can't afford to print its way to prosperity.

 

If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation.

 

Good luck to those who believe in the perpetuation of free lunches.