Showing posts with label wealth effect. Show all posts
Showing posts with label wealth effect. Show all posts

Sunday, July 20, 2025

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

 

When you net out all the assets and liabilities in the economy, the only thing that remains is our stock of productive investments, inventions, education, organizational structures, and unconsumed natural resources. Those are the basis of our national wealth—Dr. John P. Hussman 

In this issue 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

I. Reform as Spectacle: Bastiat’s Warning and the Mask of Inclusion

II. What is Seen: Promises of Efficiency and Modernization

III. The Unseen: How CMEPA Undermines the Socio-Political Economy

Theme 1: Taxing Savings, Undermining Capital Formation

Theme 2: Systemic Financial Risks and Policy Incoherence

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy

Theme 4: Institutional and Socio-Political Deterioration

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

A wolf in sheep’s clothing: A policy not only distorting capital markets but reprogramming society toward short-termism, volatility, and fragility. 

I. Reform as Spectacle: From Rhetoric to Repercussion—CMEPA Through Bastiat’s Eyes 

All legislation arrives adorned in rhetoric—its presentation aimed to evoke public trust and collective good. Much like Potemkin villages, reforms such as CMEPA appear to serve Jeremy Bentham’s ‘greater good,’ yet beneath the façade lies the concealed agenda of entrenched interests. 

Echoing Frédéric Bastiat’s indispensable insight, we must learn to discern between what is seen and what is unseen. 

"The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee. 

However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately" (Bastiat, 1850) [bold added] 

With this lens, we examine the Capital Markets Efficiency Promotion Act (CMEPA)—Republic Act No. 12214, enacted on May 29, 2025, effective July 1. 

II. What is Seen: Promises of Efficiency and Modernization 

CMEPA has been billed as a modernization effort to deepen financial markets and enhance participation. Its measures include:

  • A flat 20% tax on passive income, including interest from long-term deposits and peso bonds
  • Reduced stock transaction tax (STT) to 0.1%
  • Expanded definition of “securities” to widen taxable instruments
  • Removal of exemptions for GOCCs and long-term depositors, while retaining perks for FCDUs and lottery bettors 

Portrayed as a reform designed to streamline taxation and deepen the capital markets, CMEPA hides a more troubling reality beneath its glitter. It reveals a policy that taxes the foundations of financial stability and long-term capital formation. While it reduces transaction taxes and simplifies some rates, its deeper impact is a radical shift in how the Philippine state attempts to influence public mindset and choices—how it allocates risk, treats saving, and commandeers private resources. 

III. The Unseen: How CMEPA Undermines the Socio-Political Economy 

This critique identifies several thematic consequences: 

Theme 1: Taxing Savings, Undermining Capital Formation


Figure/Table 1

1 Flattening Tax Across All Maturities 

The new 20% final withholding tax (FWT) rate now applies across all maturities, including long-term deposits and investment instruments previously exempted. (Figure/Table 1) 

Retail savers and retirees, dependent on deposit-based income, now face disincentives for capital preservation. Long-term financial instruments lose their privileged status, undermining capital formation

2 Financial Repression by Design

By taxing time deposits, foreign currency deposits, and peso-denominated long-term instruments, CMEPA imposes a de facto penalty on saving. Rather than encouraging financial inclusion or stability, it aligns with financial repression tactics: using policy tools to channel private savings toward public financing. 

Moreover, savings and capital are diverted from productive sectors to fund fiscal deficits, choking investment and inviting misallocation

3 Regressive Impact on Small Savers 

The uniform tax rate applies regardless of investor profile. Small savers and retirees lose disproportionately. Meanwhile, the wealthy retain flexibility—shifting funds offshore or into tax-exempt alternatives. 

4 Deepening the Savings-Investment Divide 

CMEPA taxes the engine of investment—savings—while encouraging speculative behavior. As domestic savings weaken, investment becomes more reliant on volatile international capital flows and risky leveraging, heightening systemic vulnerability. 

Theme 2: Systemic Financial Risks and Policy Incoherence 

5 Balance Sheet Mismatches 

CMEPA induces short-term liabilities against long-term assets, eroding liquidity buffers. Banks stretch to meet Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) thresholds while chasing yield in speculative sectors—real estate, retail, accommodation, construction. 

FX funding stability worsens as offshore placements rise, increasing currency mismatch risk for entities with dollar-denominated obligations. 

This weakens the stability of the banking system. 

6 Weaker Bank Profitability and Liquidity 

Banks face tighter net interest margins, especially as liabilities are taxed while fixed-yield assets remain unchanged. Asset durations can’t adjust as quickly as funding costs, intensifying balance sheet compression undermining liquidity. 

Combined with BSP’s RRR cuts and other easing, this suggests rising liquidity stress rather than financial deepening.


Figure 2

The weakened deposit base—as revealed by the downtrend in the growth of deposit liabilities—partly explains the doubling of deposit insurance in March, a reactive gesture to rising liquidity risk. Notably, the slowdown appears to have accelerated in 2025. (Figure 2)


Figure 3

But it is not just deposits: the decline in cash and liquid assets—as shown by falling cash-to-deposit and liquid assets-to-deposit ratios—highlights the mounting fragility of bank conditions. (Figure 3)


Figure 4

The law compounds the fragile cash position of Philippine banks, redistributing liquidity into riskier corners of the balance sheet. 

7 Systemic Leverage Risk 

Taxing interest income inflates debt servicing costs, worsening liquidity stress across sectors already burdened with leverage. The gap between savings returns and borrowing costs widens, deepening household and corporate fragility. 

8 Undermining Financial Deepening 

Instead of encouraging broader access to financial instruments, the reform may drive savers toward informal systems, offshore accounts, or speculative assetsincreasing volatility and disintermediation. 

9 Incoherence with Monetary Policy 

When interest income is taxed heavily, monetary policy transmission weakens. A rate hike meant to incentivize saving may be neutralized by post-tax returns that remain unattractive. This creates friction between fiscal and monetary authorities. 

10 Disincentivizing Long-Term Domestic Funding 

Removing exemptions from long-duration peso instruments weakens the domestic funding base. The government may respond by issuing shorter-tenor bonds, amplifying rollover risk—particularly amid widening deficits. 

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy 

11 From Market-Based to Tax-Based Government Financing


Figure 5

CMEPA shifts the state's financing strategy from indirect borrowing (via banks' net claims on government) to direct taxation of interest income. This reduces the role of market-based funding and deepens reliance on financial repression. (Figure 5)

Philippine banks have long underwritten the government’s historic deficit spending. But with deposits eroding and liquidity thinning, can CMEPA’s pivot toward direct taxation rebalance this dynamic—or will banks be forced to sustain an inflationary financing regime they may no longer afford?

12 Crowding Out, Capital Misallocation, and Short-Termism

Taxing savings redirects capital from private to public use. Outside of government, the investment community is pushed toward velocity over duration, incentivizing speculative short-term returns rather than productive long-term investments. This leads to boom-bust cycles that consume capital and savings, ultimately lowering the standard of living for the average citizen. 

13 Reform Signals to Mask Fiscal Strain

CMEPA is marketed as efficiency reform, but its primary effect is increased revenue extraction. This is fiscalism masquerading as modernization—a stealth tax hike under the guise of pro-market policy. 

14 Wealth-Effect Ideology and Speculative Diversion 

DOF claims that CMEPA will "diversify income sources," implicitly inviting or encouraging ordinary Filipinos to engage in asset (stock and real estate) speculation. 

The BSP’s inflated real estate index, as discussed last week, aligns perfectly with this narrative. 

Yet if savings have weakened, with what are people supposed to speculate? 

In essence, the law encourages speculative behavior over productive undertakings—gambling on the trickle-down “easy money”-fueled wealth effect to stimulate growth. 

Theme 4: Institutional and Socio-Political Deterioration 

15 Favoring Non-Depository Institutions and Digital Control 

With capital markets shallow, the government’s pivot appears aimed at stock and real estate price inflation to support GDP optics. 

But there might be more to this: could the erosion of savings-based intermediation serve as a stepping-stone—or perhaps a gauntlet—to the advent of a Central Bank Digital Currency (CBDC) regime? 

16 Widening Inequality 

As savings erode and productive investment slows, the burden of taxation and financial volatility falls hardest on low- and middle-income households. Elites with offshore access or alternative vehicles thrive—amplifying the wealth gap. 

17 Capital Consumption and the Attack on Private Property 

CMEPA’s redistributive logic undermines the sanctity of private property. Through financial repression, taxation, and inflation, it transforms capital into consumption, violating the very principles of long-term economic development. 

18 Behavioral Reprogramming Toward Short-Termism 

CMEPA reorients household and institutional incentives by elevating time preferences, nudging actors toward short-term consumption and speculative tendencies. The long-term result encompasses not only economic and financial dimensions, but also social, political, and cultural shifts away from prudence. 

19 Increased State Power and Erosion of Economic and Civil Liberties

The flattening of tax treatment and the reallocation of savings toward the state reassert the growing dominance of the government over economic life. As household and institutional financial autonomy is curtailed, this fiscal centralization represents a creeping erosion of civil liberties. This is not merely fiscal policy—by asserting greater command over private savings and reducing the role of banks and savers in capital allocation, the CMEPA accelerates the centralization of economic control. 

20 Desperation, Not Reform 

Beneath the reformist language lies the scent of desperation. As government spending outpaces revenues and "free lunch" policies proliferate, the state appears increasingly willing to extract resources wherever possible, even at the cost of long-term economic damage. 

CMEPA may be seen less as a policy of modernization and more as a pretext to justify a broader power grab for control over the nation’s remaining financial surpluses. Such fiscal maneuvers reveal a growing reliance on coercive tools to finance political programs and preserve power.

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

CMEPA is not neutral. 

It is policy with intent—velocity over virtue, spectacle over substance. Beneath its reformist gloss lies a deliberate reordering of incentives: a behavioral reprogramming that elevates time preference across households, businesses, banks, and the state itself. 

The ramifications are profound. As savings erode, the economy pivots toward a spend-and-speculate framework, exposing malinvestments and shortening planning horizons. Bank balance sheets tilt toward short-duration, high-risk assets. Businesses recalibrate toward immediacy, while regulatory structures and political priorities—including education—subtly shift to accommodate the new paradigm: favoring current events over historical depth, short-term fixes over long-term resilience. 

As immediacy becomes institutionalized, political incentives may shift as well—gravitating toward authoritarian tendencies, where centralized authority and executive expedience increasingly replace civic pluralism. 

This drift accelerates leverage and volatility. Coupled with BSP’s easy money, fiscal splurging, deepening economic concentration, the entrenching of the “build and they will come” paradigm, benchmark-ism, and the subtle embrace of a war economy—where economic centralization and speculative asset inflation substitute for organic growth—the system veers toward the bust phase of a boom-bust cycle

CMEPA, dressed in reformist language, delivers structural inversion through a reordering of incentives—substituting short-term economic activity for long-term capital formation. It penalizes saving, rewards speculation, and manufactures stability to perform confidence. Its impact is philosophical as much as economic: undermining the sanctity of private property and sabotaging the long-term architecture of capital. 

As Ludwig von Mises warned: 

Saving, capital accumulation, is the agency that has transformed step-by-step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving. (Mises, 1956) 

The unseen consequences of policy often outweigh the visible promises, as Bastiat warned us. 

CMEPA’s structural tax changes reprogram public incentives in ways that may appear benign, but will likely unleash instability, fragility, and misallocation—outcomes not immediately visible, but deeply consequential. 

Unless reversed, CMEPA’s legacy will be one of hollowed market and social institutions, increased fragility of public governance, and ultimately, social unraveling—where the erosion of savings and stability gives way to volatility, inequality, and the breakdown of trust in both economic and civic life. 

CMEPA is a wolf in sheep’s clothing. 

____

References: 

Frédéric Bastiat What is Seen and What is Not Seen, or Political Economy in One Lesson [July 1850], https://oll.libertyfund.org/ 

Ludwig von Mises, The ANTI-CAPITALISTIC MENTALITY, p 39, D. VAN NOSTRAND COMPANY (Canada), LTD 1956, Mises Institute 2008, Mises.org

 

 

 

Sunday, May 01, 2022

San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021!

 

Our whole monetary system is dishonest, as it is debt-based... We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned—Malcolm Sinclair (1948-) The 20th Earl of Caithness, in a speech to the House of Lords (1997-03-05). "Our Debt-Based Money System Will Break Us". 

 

In this issue 

San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021! 

I. The Pleasant News: The Impact from the Low-Base Effect on the Top and Bottom Line 

II. SMC’s Business Model: The Shift to a Political Enterprise 

III. SMC’s HISTORIC Php 1 Trillion DEBT! 

IV. SMC and the Hyman Minsky’s Ponzi Finance Model 

V. The BSP’s Trickle-Down Effects: the SMC Example 

 

San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021! 

 

I. The Pleasant News: The Impact from the Low-Base Effect on the Top and Bottom Line 

 

Whether dealing with the Philippine economy/stock markets, COVID-19 vaccinations, or the Ukraine war, the mainstream has programmed the public to read or see their narratives as undeniable facts. 

 

The response to all other attempts to explain the contrary has been to de-platform or cancel voices of dissent. 

 

Figure 1 

CNN, March 10: The earnings of conglomerate San Miguel Corp. (SMC) registered a 120% growth in 2021, as its major businesses continued to post a robust performance. In a statement on Thursday, the group said its consolidated net income improved to ₱48.2 billion from ₱21.9 billion in 2020. Revenues last year also surged by 30% to ₱941.2 billion, while its consolidated operating income climbed 64% to ₱117.2 billion. 

 

While this news covers the pleasant segment of the 2021 annual report, it eludes some critical developments in San Miguel Corporation’s (SMC) Financial Statement.   

 

First, the low base effect has fundamentally anchored the sterling performance of SMC. 

 

Yes, the published "V-shaped" top and bottom lines gains of 2021 brought back sales and income to 2018-2019 levels. (Figure 1, topmost pane) 

 

In short, the reopening has materially narrowed the gap between the lockdown and the re-opening performance. 

 

II. SMC’s Business Model: The Shift to a Political Enterprise 

 

Next, SMC benefited from surging oil prices and public spending 

  

Because fuel sales from Petron soared by 53.2%, its share of total sales surged to 46.54% as the share of all other segments dwindled except cement and others!   

  

Curiously, energy sales posted a 16.21% growth while its share dropped to 14.21% in 2021 from 15.85% a year ago.  

  

Meanwhile, food sales expanded by 10.92%, but its share of the total also decreased to 32.91% from 38.5% in 2021. 

  

Fuel, food, and energy sales comprised 81.6%, which increased relative to a year ago due to fuel sales but has trended lower since 2016. (Figure 1, middle and lower windows) 

 

Figure 2 

 

But here is the thing. The erosion of the core business has been due to the rising share of cement real estate and the other components.  

 

Because 2021 cement and other sales growth spiked by 56.9%, its share of the total expanded to 6.3% from 5.21% a year ago. (Figure 2, upper pane) 

 

According to Eagle Cements’ 2020 annual report"About sixty-three percent (63%) of the country’s total cement demand come from Luzon region. ECC currently distributes its products in the following areas of the Luzon region: National Capital Region, Region I (Ilocos Norte, Ilocos Sur, La Union, Pangasinan), Region II (Batanes, Cagayan, Isabela, Nueva Vizcaya, and Quirino), Region III (Nueva Ecija, Bulacan, Pampanga, Tarlac, Bataan, Zambales), and Region IVA (Cavite, Laguna, Batangas, Rizal, and Quezon). As of 2020, NCR still serves as the center of construction and infrastructure activities in the country. ECC is considered as one of the leading players in areas with the highest economic activity in the Philippines with an estimated market share of 17% in NCR, Region III, and Region IVA, based on internal company data." 

 

And though the growth of infrastructure sales jumped 35.2% in 2021, its share of the total increased incrementally to 2.09%.  

 

Despite volatile economic prices, SMC’s gross margins barely changed in 2021. (Figure 2, lower pane) 

 

As 2021 has shown, SMC benefited from the surge in oil prices, which transferred resources of the consumers and non-energy industries to them. It also benefited from the record public spending of the outgoing administration, paid for by taxpayers and the peso.  

 

Because redistribution has anchored its business model, SMC increasingly depends on political developments or political distribution of economic opportunities. Such showcases the political-economic model of rent-seeking or "the competition for politically protected transfers of wealth." (Britannica) 

 

III. SMC’s HISTORIC Php 1 Trillion DEBT! 

 

 

Figure 3 

But that is not all. 

 

SMC debt conditions represent a historic corporate development unreported by the media.  

  

The firm's published balance sheet debt astoundingly breached the Php 1 Trillion mark in 2021! (Php 1,004,744,000) (Figure 3, topmost window) 

  

ONE TRILLION plus (and counting)!!!  

 

It is the first Philippine listed company to reach that eye-popping threshold! Incredible! 

  

Paraphrasing a quote attributed to the late US Senator Everett Dickson"A trillion here, a trillion there pretty soon you're are talking about real money."  The US Senator referred to the PUBLIC DEBT ceiling back then.  

  

As the SMC investor presentation implicitly defended, Total Liabilities to Equity was 2.01x, Debt to Equity was 1.47x, EBITDA to Total Interest expense was 3.39x, while net debt to total equity was .9x. (Figure 3, middle window) 

 

In addition, its debt level has risen above its aggregate annual sales and accounts for about three times SMC's market capitalization. 

  

The interest coverage ratio dropped to its second-lowest in 2021. (Figure 3, lowest window) 

  

It is unclear if SMC holds off-balance sheet debts. 

 

While SMC reported an income of Php 48 billion, it borrowed a Php 97 billion, or twice the net income.  

 

With the entry of the new administration in 2016, the firm's borrowing streak has only gained momentum since 2017.  

 

Stunning. 

 

Figure 4 

 

SMC has consistently been borrowing above its published income for over a decade (except 2016) (Figure 4, topmost pane) 

 

IV. SMC and the Hyman Minsky’s Ponzi Finance Model 

 

Yet, the numbers barely elucidate how these got here. 

 

Despite the streak in debt growth, interest expenses have essentially shadowed the BSP’s official policy rates.  

 

That is, when the BSP rescued the markets by injecting an unprecedented amount of liquidity to the financial system partly by lowering rates in 2020, as a wholesale borrower, such policies had been instrumental in reducing SMC’s interest expense. (Figure 4, middle pane) 

  

In this context, the BSP had played a critical role in the transformation of San Miguel from a food enterprise to a political enterprise. Cheap credit from the BSP financed its metamorphosis, even before the pandemic. 

 

So with rates on a downtrend, SMC seems to have gotten bolder; it anted up the scale of its debt acquisition. 

  

In my humble opinion, the company seems to epitomize the neo-Keynesian Hyman Minsky’s The Financial Instability Hypothesis (FIS), where the process of leveraging transitions from Hedge, Speculative to Ponzi financing. In the last phase or the Ponzi financing stage, cash flows from operations may not be sufficient to cover repayment of the principal and interests, so the company borrows more or sells its assets to pay creditors off.  

 

It is unclear whether the published income of SMC represents accounting or actual profits. But the Php 64 trillion predicament is, why the accelerating scale of borrowing, which is unsupported by its Capex? What seems to be the case is that the acquisition of new debt has primarily been to finance the old debt. 

 

On that score, SMC's debt demonstrates the mounting concentration risks of the financial system. 

 

SMC's debt signifies about a record 3.8% of the total resources of the Philippine financial system! (Figure 4, lowest pane) 

 

But in 2021, foreign-denominated debt comprised about 38.7% of the gross total or 43.43% of the net. This means that the duration risk of the company is not limited to changes in domestic rates but foreign rates too! 

 

Figure 5 

 

Yields of 10-year USTs have raced faster than the Philippine counterpart, which means higher cost of financing for all forex debt, including public debt and the BSP’s derivatives, which it uses to pad its GIRs. (Figure 5, upper pane) 

 

While the public spending spree shielded SMC shares from rising USTs in 2017-18, with the current debt load, I doubt if SMC shares can generate the same magic. (Figure 5, lower pane) 

 

And because the firm concentrates on the domestic economy, which means it hardly earns foreign exchange, its exposure to foreign debt translates to amplified sensitivity to currency risks. 

 

Currency risks from the mounting FX debt exposure of the government and many firms have prompted the BSP to keep the peso from falling by leveraging up and using derivatives. 

 

V. The BSP’s Trickle-Down Effects: the SMC Example 

 

As mentioned above, aside from opportunities provided by increased politicization of the economy, the easy money policies of the BSP seem to have magnified the rent-seeking business model of SMC. 

  

What are the opportunity costs of snowballing debts of SMC? 

  

With such a humungous scale of borrowing, how many small and medium scale enterprises would have benefited instead? 

 

To what extent of SMC debt-financed exposures signify malinvestments?  

 

SMC has corralled a significant amount of finances which effectively demonstrates the trickle-down policies of monetary authorities. Yet, in this case, the so-called benefits have morphed into a cost: a too-big-too-fail risk! 

 

How is this justifiable? 

  

Should financial and liquidity tightening limit its access to cheap money; how would SMC cope or thrive with over a trillion in liabilities?  

 

Or how fragile is SMC once the rising interest rates percolate into its balance sheet? 

 

Most significantly, what will be its direct and indirect effects on the domestic financial system? 

 

SMC’s escalating debt story is a symptom of a systemic malaise.