June 2025 Deficit: A Countdown to Fiscal Shock

In the final analysis, it’s just central banks printing money, reducing its value and causing inflation as they support dishonest governments that refuse to be fiscally responsible and continually run massive deficits. Such policies flow from the “elite’s” greed and their insatiable thirst for power, benefiting themselves at the expense of the middle class and working poor… When a society loses its moral foundation, it’s only a matter of time before the economy and currency deteriorate and the wealth gaps between the rich and poor increase dramatically—Jonathan Wellum  

In this issue

June 2025 Deficit: A Countdown to Fiscal Shock 

I. A Delayed Reckoning: Anatomy of a Fiscal Shock

1. Easy Money–Financed Free Lunch Politics

2. The Political Cult of Spending-Led Ideology: Trickle-Down by Government Fiat

3. Chronic Policy Diagnostic Blindness

4. Econometric Myopia: Forecasting the Past

5. Behavioral Fragility: The Psychology of Denial

II. Countdown to Fiscal Shock: The Hidden Story of June’s Blowout

III. Q2 Slowdown, Q1 Surge: Anatomy of the Half-Year Blowout—From Past Binge to Present Reckoning

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance

V. Deficit Forecasting: Averaging Toward a Crisis

VI. Financing Strain and the Debt-Debt Servicing Spiral

VII. Tax Dragnet, CMEPA’s Forced Financial Rotation: The Economic Asphyxiation Tightens

VIII. Bank’s Fiscal Complicity, Liquidity Strains, Treasury Market’s Mutiny

IX. Mounting USDPHP Exchange Rate Tension

X. Conclusion: The Structural Fragility of Deficit Philosophy 

June 2025 Deficit: A Countdown to Fiscal Shock 

When deficits become destiny: the fiscal countdown accelerates—a convergence of easy money and political overreach

I. A Delayed Reckoning: Anatomy of a Fiscal Shock 

A fiscal shock rarely emerges from a single misstep. It crystallizes from compound misalignments across policy, ideology, and behavior. It’s the law of unintended consequences—unfolding in real time. Where economic orthodoxy meets political convenience, stability is hollowed out. And just as critically, it’s a delayed consequence of systemic denial. 

Here are the five pillars of this reckoning: 

1. Easy Money–Financed Free Lunch Politics 

A regime of entitlement—fueled by populist spending and post-pandemic ultra-low rates—fostered a seductive illusion: 

Deficits don’t matter. Debt is painless. 

Years of stimulus, subsidies, and politically popular transfers hardened into fiscal habit— habits that now resist restraint, and are rooted in beliefs that are difficult to dismantle. 

2. The Political Cult of Spending-Led Ideology: Trickle-Down by Government Fiat 

At the heart of the Philippine development model lies a flawed political-economic ideology: that elite consumption and state expenditure will "trickle down" to the broader economy. 

Massive infrastructure programs, defense outlays, and subsidy-heavy welfare budgets may deliver short-term optics—but they also crowd out private investment, misallocate capital, and accelerate savings erosion. 

The result: an economy that becomes top-heavy, brittle, and structurally vulnerable. 

This heavy-handed, statist-interventionist, anti-market bias is what Ludwig von Mises called "statolatry"—the worship of the state. 

3. Chronic Policy Diagnostic Blindness 

In the social democratic playbook, populist tools dominate. And with them comes a dangerous neglect of structural realities:

• Crowding out is ignored
• Balance sheet mismatches are waved off
• Price distortions go unexamined
• Resource misallocations are dismissed
• Economic trade-offs are neglected 

Intervention becomes the default—not the diagnosis. The result? Mispriced assets, distorted capital structures, and risk narratives untethered from fundamentals. 

The same statolatry—elevating state action above market signals—undergirds this blindness. It promotes interventionist reflexes at the expense of incentive clarity and institutional coherence. 

Fragility escalates—masked by the optics of populist-driven fiscal theatrics. 

4. Econometric Myopia: Forecasting the Past 

The establishment clings to econometric models built on frangible assumptions—historical baselines, linear extrapolation, and trend mimicry. These tools overlook what matters most: 

• Nonlinear disruption
• Inflection points
• Complex feedback loops
• Tail risks and structural breaks 

With ZERO margin for error, fragility festers beneath the surface. 

That fragility was laid bare by a maelstrom of paradigm shifts: 

• The pandemic rupture
• Deglobalization and trade fragmentation
• Raging asset bubbles
• Debt overload
• Mountains of malinvestments
• Hot wars and geopolitical shockwaves
• Inflation surges
• Financial weaponization 

This isn’t noise—it’s a new architecture of global and domestic uncertainties. And econometric orthodoxy isn’t equipped to model it. 

5. Behavioral Fragility: The Psychology of Denial 

Heuristics shape policy—and not in ways that reward foresight. Beyond populist signaling and econometric hindsight, cognitive distortions rule: 

• Recency bias
• Rear-view heuristics
• Political denialism masked as institutional confidence 

Years of perceived “resilience” dulled vigilance: 

• Every deficit was shrugged off
• Every peso slide deemed temporary
• Every fiscal blowout “absorbed” by the system 

This cultivated an expectation: past stability ensures future resilience. It doesn’t. That assumption—embedded deep within policy reflexes—has left institutions blind to volatility and ill-equipped for disruptions and rupture. 

II. Countdown to Fiscal Shock: The Hidden Story of June’s Blowout

Figure 1

In May, we warned that if June 2025's deficit merely hits its four-year average of Php 200 billion, the six-month budget gap would surge to Php 723.9 billion—surpassing the pandemic-era record of Php 716.07 billion. (Figure 1, upper window) 

Inquirer.net, July 25, 2025: The Marcos administration exceeded its budget deficit limit in the first half of 2025 after narrowly missing both its spending and revenue targets. This happened amid a gradual fiscal consolidation program. Latest data from the Bureau of the Treasury (BTr) showed the government logged a budget gap of P765.5 billion in the first six months, which it needed to plug with borrowings. This was 24.69 percent bigger compared with a year ago. (italics added) 

Then came the payload: Php 241.6 billion in fresh red ink last June!   

The government’s first-half deficit reached Php 765.5 billion—24.69% higher than last year and larger than even our most aggressive baseline x.com forecast (Php 745.18–Php 756.53 billion). (Figure 1, table)

Figure 2 

Bullseye! Our projections weren't just close—they were surgical. And the final blowout went further still. (Figure 2, topmost chart) 

Curiously underreported, June’s deficit marked an all-time high, driven by expenditure growth of 8.5% outstripping revenue growth of 3.5%. (Figure 2, middle graph) 

• BIR Collections: Up 16.24% YoY—a strong bounce from 10.71% in May and 4.71% in June 2024.
• BoC Collections: Recovered 3.23% YoY, compared to –6.94% in May and 0.67% in June 2024.
• Non-Tax Revenues: Plunged 43.25% YoY—from 40.93% in May and 81.7% in June 2024. 

Behind the aggregate improvement lies deeper fragility: June’s revenue outperformance was narrow, uneven, and ultimately insufficient to contain the programmed spending expansion—a predictable artifact of the conventional socio-democratic ochlocratic political model. 

Populist instincts override structural diagnostics. And the fiscal narrative remains hostage to crowd-pleasing interventionism rather than incentive discipline or institutional coherence.

III. Q2 Slowdown, Q1 Surge: Anatomy of the Half-Year Blowout—From Past Binge to Present Reckoning 

Despite June's record deficit, Q2 posted just Php 319.5 billion, the second slowest since 2020. That means the bulk of the six-month deficit—Php 446.03 billion—was frontloaded in Q1. 

Even then, authorities revised March spending down by Php 32.784 billion, artificially narrowing the Q1 deficit. Adjustments may mask the underlying magnitude but not the fiscal trajectory. 

This six-month outcome validates what we’ve long emphasized: programmed spending vs. variable revenues is no longer an assumption—it’s a structural vulnerability, a primary source of instability 

Importantly, this wasn’t an emergency stimulus. Unlike 2021, there’s been no recession nor one in the immediate horizon—per consensus. 

Yet the deficit beat that year’s record—despite BSP’s historic easing:

• Policy rate cuts
• Reserve requirement reduction
• USDPHP cap
• Liquidity injections
• Deposit insurance expansion 

Behind the optics: a quiet financial bailout, not of households or industries, but of the banking system. 

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance 

As we earlier noted: the government continues to use linear extrapolation in a complex environment. Even with declared economic slowdown, the BIR posted 14.11% growth, buoyed by May–June outperformance. (Figure 2, lowest image) 

But has "benchmark-ism" inflated performance claims? Have authorities padded the numerator (tax data) to rationalize a fragile denominator (spending data)?

Figure 3

Non-tax revenue was the Achilles’ heel—its 2024 spike became the baseline for 2025’s enacted spending binge. The result: forecast miscalibration leading directly to fiscal shock. Beyond mere overconfidence, it was technocratic hubris that helped trigger today’s blowout. (Figure 3, topmost visual) 

Again, an underperforming economy—whether a below-target GDP, sharp slowdown, or even recession—would only reinforce this SPEND-and-RESCUE dynamic, repackaged and sold as stimulus. 

Meanwhile, authorized expenditures: Php 3.026 trillion. Remaining balance: Php 3.3 trillion, implying a floor monthly average of Php 550.05 billion. 

Budgets have been breached 6 years in a row—highlighting a redistribution of budgetary power from Congress to the Executive. 

Whether through creative reinterpretation or technical loopholes, these breaches signal a quiet transfer of fiscal power from Congress to the Executive. 

V. Deficit Forecasting: Averaging Toward a Crisis 

Looking at pandemic-era averages:

• Q3 deficits averaged Php 374 billion
• Q3 2024 hit Php 356.32 billion (–5.7% below average)
• Q4 averaged Php 537.9 billion Q4 is typically the largest—as government drops all remaining balance and more
• Q4 2024 deficit: Php 536.13 billion (–0.4% deviation)
• 2H Average: Php 911.6 billion
• 2H 2024: Php 892.45 billion (–2.6% vs trend) 

If 2025 follows this pattern, the full-year deficit could hit Php 1.677 trillion—Php 7 billion above prior records. 

But averages conceal real-world volatility, political discretion, and data manipulation—can skew results. 

Once again, it bears emphasizing: all this unfolded as the BSP eased aggressively—through rate and RRR cuts, doubled deposit insurance, capped USDPHP volatility, and expanded credit (mostly consumer-focused). 

Despite the stimulus, vulnerabilities not only persist—they’re escalating. 

If so, the DBCC's revised deficit-to-GDP target of 5.5% would be breached, necessitating another substantial upward adjustment. (Figure 3, middle table) 

Authorities would be mistaken to treat this as mere statistical noise; its implications extend far beyond the ledger into the real economy

VI. Financing Strain and the Debt-Debt Servicing Spiral 

Treasury financing soared 86.2%, from Php 665 billion to Php 1.238 trillion in H1 2025. (Figure 3, lowest diagram) 

Even with record high cumulative cash reserves of Php 1.09 trillion, June alone posted a residual cash deficit of Php 90.09 billion—evidence that surplus buffers are already depleted.

Figure 4 

As such, in June, public debt spiked Php 1.783 trillion YoY (+11.52%) or Php 348 billion (+2.06%) MoM to reach a historic Php 17.27 trillion! (Figure 4, topmost pane) 

Critically, this growth has outpaced the spending curve, suggesting potential deficit understatement or an acceleration of off-book liabilities. (Figure 4, middle image) 

Despite this, external debt share rebounded in June—a pivot back to foreign financing amid domestic constraints. (Figure 4, lowest graph)

Figure 5

Meanwhile, total debt servicing fell 40.12% YoY due to a 61% plunge in amortizations, even though interest payments hit a record. (Figure 5, topmost diagram) 

Why?

Likely causes:

• Scheduling choices
• Prepayments in 2024
• Political aversion to public backlash 

But the record and growing deficit ensures that borrowing—and debt servicing—will keep RISING. This won’t be deferred—it will amplify. 

As we warned last May

• More debt → more servicing → less for everything else.
• Crowding out hits both public and private spending.
• Revenue gains won’t keep up with servicing.
• Inflation and peso depreciation risks climb.
• Higher taxes are on the horizon 

VII. Tax Dragnet, CMEPA’s Forced Financial Rotation: The Economic Asphyxiation Tightens 

Debt-to-GDP hit 62%, triggering a quiet revision: Malacañang raised the ceiling to 70%. 

To accommodate this, authorities imposed a hefty tax on interest income via the Capital Markets Efficiency Promotion Act (CMEPA), engineering a forced rotation out of long-dated fixed income into leverage-fueled speculation and spending— (see previous discussions) 

This fiscal extraction dragnet is poised to widen—ensnaring more of the economy and constricting what little fiscal breathing room remains. 

VIII. Bank’s Fiscal Complicity, Liquidity Strains, Treasury Market’s Mutiny 

Banks continue to stockpile government securities through net claims on the central government (NCoCG). (Figure 5, middle image) 

Yet despite BSP’s easing, treasury yields barely moved—fueling further Held-to-Maturity (HTM) hoarding and deepening the industry's liquidity drain. 

At end of July, despite dovish guidance: (Figure 5, lowest graph) 

• Yields across the curve stayed above ONRRP, muting or blunting transmission
• Curve flattened unevenly: front and long ends softened, belly firmed—signaling hedging against medium-term risk
• T-bill rates remained elevated —signaling inflation fears and short-term funding stress 

Despite rate cuts, the treasury market refused to follow. Monetary policy faces bond mutineers. 

IX. Mounting USDPHP Exchange Rate Tension

Figure 6 

Following the June fiscal report, the USDPHP surged 1.29% on July 31, wiping out prior losses to post a modest 0.52% year-to-date return. 

With wider deficits on deck, foreign borrowing becomes more attractive—and a weaker dollar, further incentivized by the BSP’s soft peg, adds fuel to that pivot. But beneath the surface, this dynamic strain long-term currency stability. 

While global dollar softness might offset domestic fragilities, the USDPHP’s recent breakout hints at further testing—possibly probing the BSP’s 59-Maginot line, a psychological and tactical policy threshold. (Figure 6 upper chart) 

Should that line give, external financing costs and FX volatility could surge, exposing cracks in the peg architecture. (Figure 6, lower graph) 

X. Conclusion: The Structural Fragility of Deficit Philosophy

The Php 17.27 trillion debt—and growing—isn’t the cost of failure. It’s the price of consensus under a soft-focus ochlocratic social democracy. 

These systems don’t just elect leaders—they ratify an ethos: that deficit-fueled expansion is not only moral but inevitable. Redistribution becomes ritual. The annual SONA pipelines new spending schemes, boosting short-term political capital—but the structural anchors are threadbare. 

Compassion without discipline sedates policy. Voters misread rhetoric as reform, empathy as capability, largesse as virtue, and control as stewardship. Time preferences spiral, gravitating toward the instant dopamine hit of political dispensation. 

Alas—the tragedy is not merely fiscal. It’s intergenerational erosion. Each electoral cycle mortgages future agency, compounding fragility over time. 

What’s swelling isn’t just debt. It’s a philosophical incoherence—subsidizing dysfunction and labeling it 'development.’ 

When such convictions are deeply embedded, a disorderly reckoning is inevitable. 

____

References 

Prudent Investor Newsletter, The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock? Substack July 7, 2025 

Prudent Investor Newsletter, Is the Philippines on the Brink of a 2025 Fiscal Shock? Substack June 8, 2025 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, Substack May 4, 2025 

Prudent Investor Newsletter, The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 20, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments’ debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing—Edward Chancellor 

In this issue

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

I. Introduction: Evading the Real Issue

II. The Fallacies Behind the CMEPA’s Defense

A. False Equivalence

B. Red Herring

C. Categorical Error

D. Begging the Question

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”)

F. Appeal to the General (Overgeneralization)

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback 

Logical fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they obscure financial repression and pave the way for systemic economic backlash. 

This is a follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

I. Introduction: Evading the Real Issue 

The Capital Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not merely because of its tax provisions but because of what it signals about the evolving relationship between the state and citizen savings. 

While defenders of CMEPA claim it merely modernizes financial taxation and expands savings options, these arguments often rest on flawed logic and misleading equivalencies that mask the deeper issues: the erosion of true savings, the rise of speculation, and creeping state control over private capital.

Besides, in classical economic thought, savings is deferred consumption—a temporal anchor against uncertainty, a moral wager on future stability. Time-bound, low-risk instruments like term deposits have long served this function. They do not aspire; they buffer. When the state flattens the tax incentives protecting this buffer, it doesn’t merely tweak an equation—it alters the meaning of saving. 

II. The Fallacies Behind the CMEPA’s Defense 

CMEPA's defenders lean on several logical fallacies to support their case: 

A. False Equivalence: By equating time-bound savings with speculative financial assets such as stocks or REITs, proponents confuse two fundamentally different financial behaviors. Savings are deferred consumption; risk assets are bets on volatility. 

B. Red Herring: Arguments pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail Treasury Bonds distract from the core concern: CMEPA disincentivizes bank-based, low-risk savings that traditionally fund long-term development. 

C. Categorical Error: To assume that financial markets can substitute for savings systems ignores the institutional role of savings in capital formation, stability, and intermediation. 

D. Begging the Question: CMEPA defenders assume what they must prove: that taxed savings instruments still count as savings (tax = savings or 1-1=2), or that savings will simply shift outside time deposits without consequence. This begs the question. 

It presumes that risk assets and government-managed schemes are natural substitutes for time deposits. It conflates taxation with neutrality, ignoring how incentives shape behavior.

In reality, aside from extraction, tax is a signal, not a passive overlay. And when the signal penalizes duration, it redefines savings itself. 

Worst, it also treats financial repression as benign without examining its structural damage to intermediation, capital formation, and systemic liquidity.

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”) 

Defenders highlight only the seen—that capital might shift to “alternative” instruments like stocks or Pag-IBIG MP2. 

What is seen:

1. Lower taxes on REITs and stocks = more investment.

2. Flat tax on deposits = not new, fairness 

But they ignore the unseen: 

1. weakening of bank intermediation via the erosion of long-term bank funding,

2. The crowding out of private credit channels, and

3. The behavioral shift toward liquidity-chasing speculation, which gives rise to

4. increased market and economic volatility 

Policy must be judged not just by its immediate effects, but by its downstream damage. This is the classic Bastiat fallacy—what is unseen—the fragility, the distortion, the systemic cost—often matters more. 

F. Appeal to the General (Overgeneralization) 

CMEPA’s defenders argue that because some financial instruments like stocks, REITs, or Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for traditional savings. 

But this overlooks key details: liquidity risk, volatility, transitional frictions or tensions, accessibility, ceilings, investor profile and behavioral inertia that constrain real-world reallocation. 

Not all instruments serve the same function—especially for households that need capital preservation over yield. 

This fallacy blurs crucial distinctions between risk assets and true savings vehicles. By appealing to broad categories, it sidesteps the very real limitations and risks of reallocating savings. In policy, the details are the difference between resilience and fragility. 

Policy design and evaluation demands specificity: Without disaggregated data on household savings patterns, bank funding structures, and instrument uptake, differentiating between resilience and fragility, the defense becomes narrative and rhetoric, not analysis. 

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities 

Since the BSP’s structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have steadily declined. 

This erosion has profound implications for the liquidity foundations of the Philippine financial system. 

Figure 1 

Notably, time deposits briefly surged during two critical junctures: first, when the BSP’s policy rates hit record lows during the pandemic, and again when aggressive rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1, topmost pane) 

Subsequent M2 growth increasingly leaned on more liquid components—such as demand deposits and currency in circulation—rather than long-term savings. 

In effect, liquidity transformation has shifted away from stable deposits toward more volatile sources: demand-driven credit expansion and the banking system’s financing of government liabilities, as evidenced by the surge in net claims on the central government (NCoCG). (Figure 1, middle graph) 

The CMEPA tax will likely accelerate this liquidity vacuum by further penalizing traditional savings vehicles. 

This structural shift presents a systemic challenge. As deposits decline, credit expansion becomes increasingly unanchored from genuine savings. In tandem with both implicit liquidity support (via bank balance sheets) and direct quantitative easing (via the BSP), this dynamic becomes inherently inflationary and destabilizing. 

The dilemma is mirrored in bank balance sheets. 

The time deposit share of total bank liabilities has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest diagram) 

This plunge coincides with a decade of financial repression: persistently low real rates, high inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA accounts. 

As traditional deposits dwindled, banks turned increasingly to borrowings to fill the liability gap. 

The share of bank borrowings from capital markets has been rising since 2015, ironically peaking just before the pandemic recession in 2019. This share temporarily declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in. 

Yet as liquidity stress intensified, bank borrowing surged anew—hitting 7.9% in March 2025—before moderating after the BSP’s second leg of RRR cuts. 

In this context, what CMEPA promotes as capital market reform in practice amounts to an escalation of the erosion of the deposit base. It trades long-term stability for short-term borrowing, redirecting household savings away from private financial intermediation and into state debt. 

The result? A more fragile banking system, less private capital formation, and greater macro-financial risk. 

Moreover, these bank borrowings now compete directly with government financing needs and private sector credit demand—exacerbating the crowding-out effect and tightening liquidity conditions for the broader economy. 

This fragility is amplified by the growing concentration of liquidity within a handful of dominant players.

Figure 2

As of May, Philippine banks controlled 82% of total financial resources or assets, with universal-commercial banks accounting for 76%. (Figure 2, topmost image) 

Meanwhile, even as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2% in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP become dependent on liquidity, but, importantly, money creation is no longer translating into real economic or savings growth. (Figure 2, middle chart) 

Taken together, as banks increasingly monopolize liquidity while time deposits diminish, the financial system becomes more fragile. It is precisely this growing instability that forced the BSP to roll out confidence-boosting measures—including the doubling of deposit insurance coverage and the second phase of the RRR cut. These are not signs of strength. They are signs of deepening systemic stress.

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap 

At first glance, gross domestic savings (GDS) might seem useful for assessing national savings conditions, but its use to account for real savings conditions is generally misleading. 

First, as a derived indicator—not a strict accounting identity—it suffers from definitional inconsistency. 

For instance, the World Bank reports it at 9.3% in 2024, while Trading Economics, citing the same source, shows 29.24%. Same source, vastly different realities. (Figure 2, lowest window) 

Second, it is calculated as: 

GDS = GDP – Total Consumption (private + public). 

But GDP itself is indifferent to distributional nuances. As we always ask here: Cui bono or Who benefits? 

Is the savings outcome driven primarily by genuine productivity gains—or by increasing dependence on leverage? What is the quality of the growth? What ratios of cost, allocation, and extraction were involved? 

Third, the GDS measure masks household savings weakness—especially during capital flight or high profit repatriation. 

Fourth, how are these "savings" reflected in the banking system? 

Even when elevated GDS suggests high aggregate capacity, the reality is that available savings for productive intermediation—such as long-term deposits and investible capital—are scarce. CMEPA threatens to worsen this distortion by tilting incentives toward consumption and speculation. 

Put differently: while 2024 GDS appears deceptively high at over 29% of GDP, net national savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank estimates. 

This reveals a deep structural fragility in the country's true capacity to accumulate capital. By penalizing savings and redirecting flows into speculative capital markets, CMEPA threatens to widen this gap and exacerbate the very vulnerabilities it claims to address.

Figure 3

Yet—and this is key—BusinessWorld recently produced a chart based on Philippine Statistics Authority (PSA) data showing the second widest gap between saving rates (apparently from the World Bank) and investment rates —which we discussed last March. (Figure 3, topmost visual) 

If savings were truly robust, why does this gap persist? What finances this chasm? 

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage 

Cherry-picking numbers to defend the law ignores that the savings-investment gap has been manifested through ‘twin deficits’—fiscal and external trade. Despite supposed normalization post-pandemic, the Philippine economy remains at pandemic-level dependency on credit. (Figure 3, middle graph) 

Here’s the key: public spending is part of those investment rates. 

Bureau of the Treasury data revealed that the 2025 first-half fiscal deficit hit a record Php 765.49 billion—even without a recession! This confirms earlier warnings, which we’ll expand on in another post. (Figure 3, lowest diagram) 

So, who finances this? Domestic banks and foreign lenders are now absorbing this growing imbalance. 

As previously noted: 

"A shrinking domestic savings pool limits capital accumulation, increases dependence on external financing, and exposes the economy to risks such as debt distress and currency fluctuations."— Prudent Investor, March 2025

Figure 4

As of May, public debt hit a record Php 16.918 trillion, with June data expected to breach Php 17 trillion —the all-time high deficit will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%? (Figure 4, upper graph) 

Meanwhile, combined with total bank credit expansion, systemic leverage reached a new record of Php 31.225 trillion, or 118% of 2024 nominal GDP. (Figure 4, lower chart) 

And that figure excludes: 

• Capital market debt issuance (corporate bonds, CMBS)
• FDI-linked intercompany loans
• Informal debt (pawnshops, personal lending, unregulated finance)

Think of the costs: this credit buildup means rising debt servicing burdens, declining real incomes, and growing risks of delinquencies and defaults. 

More importantly, in the absence of productivity-led savings growth, the Philippine economy is running on borrowed money—and borrowed time.

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2 

Defenders of CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for taxed time deposits. 

But these are neither comprehensive nor scalable: 

MP2 has annual ceilings and requires Pag-IBIG membership. 

RTBs are state-managed, episodic, and offer limited liquidity.

Figure 5 

Latest BSP data: (Figure/Table 5) 

• Total time deposits in the PH banking system: Over Php 5 trillion
• Long-term deposits (>5 years): ~Php 500–Php 700 billion
• RTB retail uptake: ~Php 175 billion
• MP2 inflows: ~Php 30–Php 50 billion/year 

Combined, RTBs + MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of tax incentives. The rest sits idle, chases risk, or exits the formal system. 

More critically, these instruments are not substitutes for a diverse, open savings ecosystem. They represent state-controlled pipelines—a form of financial repression where household capital is diverted into funding public consumption, and paid for by the diminishing purchasing power of the peso. And this is supposed to ‘encourage’ savings growth? Really?

This contradicts the narrative that these flows remain as ‘savings outside’ time deposits. On the contrary, it is a narrowing of financial autonomy. 

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den 

As previously discussed, the policy-induced gambling mentality has migrated to the equity markets. Instead of encouraging true savings, CMEPA will foster boom-bust cycles that further erode wealth and fuel capital consumption. 

This week’s coordinated pre-closing and afternoon pumps illustrate how institution-dominated markets manage the main index for optics—what we might call "benchmark-ism." (Figure 5, lower graph)

Though it escapes the Overton Window, this behavior—like CMEPA—distorts the price signal function of capital markets, leading to the misallocation of capital goods in the economy. 

By stoking gambling instincts, markets become casinos where savings and credit—someone else’s savings or bank-issued liquidity—is converted into house profits. 

When capital markets are manipulated for non-market goals, the effect is the same: momentum cloaking a wealth transfer. 

CMEPA leads savers straight into the lion’s den. 

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

In an age where reform rewards liquidity and penalizes patience, true saving becomes a philosophical—and revolutionary—act. It’s no longer just economic prudence. It’s resistance to engineered ephemerality. 

The ideology driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant. Be taxable. Be subservient to the state. 

The public must reply: Be steady. Be real. Be cautious. And above all—be sovereign. 

This is not academic critique—it’s a warning. When incentives distort prudence, the fallout is material, not theoretical. 

CMEPA does not act alone. It fuses with a wider architecture of distortion:

• BSP’s redistributionist easing cycle
• Record deficit spending
• An implicit USDPHP soft peg
• Accelerating bureaucratization and economic centralization 

Together, they form the scaffolding of financial and social maladjustment. 

And when crises surface—households hemorrhaging stability, banks scrambling for duration, systems unraveling under engineered fragility—the reckoning will be felt everywhere. 

In that moment, accountability will matter. 

We must remember: Who authored this distortion? Who rationalized it as progress? 

And we must prepare—for its backlash. 

___

References

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025, Substack

 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.