Maharlika's NGCP Investment: Economic Nationalism or a Bailout?

 

Don’t you need some ‘wealth’ to create a ‘wealth fund?’ Norway did it with the money it got from North Sea oil. China’s trillion-dollar wealth fund comes from its trade surpluses. Where will the US wealth come from? The government runs deficits—Bill Bonner 

In this issue 

Maharlika's NGCP Investment: Economic Nationalism or a Bailout?

I. Introduction: Maharlika's First Test: Can Conflicting Objectives Deliver Optimal Returns?

II. The Legacy of NAPOCOR: A Historical Overview and its Cautionary Lessons

III. Geopolitical Tensions Permeate the Power Sector

IV. MIC’s Investment in NGCP: A Revival of Economic Nationalism? Shades of Napocor?

A. Advance National Security by Strengthening Oversight of NGCP Management?

B. Economic Benefits: Lowering Electricity Costs by Enhancing Grid Efficiency?

V. Maharlika's NGCP Investment: A Bailout in Disguise? Potentially Inflating an SGP Stock Bubble?"

VI. Maharlika’s Risks and Potential Consequences

VII. Conclusion 

Maharlika's NGCP Investment: Economic Nationalism or a Bailout? 

Is Maharlika’s exposure to the National Grid Corp. about investments, economic nationalism, or a bailout of SGP? Or could hitting all three birds with one stone be feasible? 

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Nota Bene: This post does not constitute investment advice; rather, it explores the potential risks associated with the recent acquisition of the National Grid Corp. (NGCP) of the Philippines by the Maharlika Investment Corporation, through its controlling shareholder, Synergy Grid and Development Philippines Inc. (SGP).

I. Introduction: Maharlika's First Test: Can Conflicting Objectives Deliver Optimal Returns?

First some news quotes. (all bold mine)

Philippine News Agency, January 27, 2025: Under the deal, MIC will purchase preferred shares in SGP, granting the government a 20 percent stake in the company, which holds a significant 40.2 percent effective ownership in NGCP, the operator of the country’s power grid. Consing noted that the deal will also provide the government with board seats in both SGP and NGCP. “Once the acquisition is completed, we shall be entitled to two out of nine seats in the SGP board, after the total seats are increased from seven to nine. At NGCP, the government gains representation through two out of 15 board seats, following an increase in the total seats from 10 to 15,” he explained. The investment is seen as a crucial step for the government to regain control over the nation’s vital power infrastructure.

Inquirer.net, January 29, 2025: The country’s sovereign wealth fund is investing in the National Grid Corp. of the Philippines (NGCP) to allow the government to monitor the possible emergence of external threats, the head of Maharlika Investment Corp. (MIC) said on Tuesday. MIC president and chief executive officer Rafael Consing Jr. said they would also be interested in buying the 40-percent NGCP stake owned by a Chinese state-owned company once the opportunity arises. 

Inquirer.net, January 28, 2025: The way NGCP can contribute to lower electricity is by ensuring that that rollout indeed happens. Because once you have that transmission grid infrastructure being rolled out successfully, then you would have more power players that can in fact get onto the grid and provide supply to the grid. And, obviously, just like any commodity, as you’ve got more supply coming in, the present power will, at some point in time, come down

The Philippines' sovereign wealth fund (SWF), the Maharlika Investment Corporation (MIC), has made its first investment by acquiring a 20% stake in Synergy Grid and Development Philippines Inc. (SGP), the majority holder of the National Grid Corporation of the Philippines (NGCP), a firm listed on the Philippine Stock Exchange (PSE) 

Is this move primarily about economic interests, or does it also serve geopolitical objectives? 

Is the MIC being used to facilitate the re-nationalization of NGCP by phasing out or displacing China’s state-owned State Grid Corporation of China (SGCC), which holds a 40% stake? 

Or has this, in effect, been an implicit bailout of SGP? 

If so, how can achieving domestic and geopolitical objectives align with the goal of attaining desired financial returns?  

Or how could competing objectives be reconciled to achieve optimal returns? 

II. The Legacy of NAPOCOR: A Historical Overview and its Cautionary Lessons

To better understand the current situation, let's first examine the origins of NGCP, tracing its roots back to its predecessor, the National Power Corporation (NPC). 

The NAPOCOR (NPC), was once the behemoth of the Philippine power industry, centralizing control over both the generation and transmission of electricity. 

Established in 1936 as a non-stock, public corporation under Commonwealth Act No. 120, nationalizing the hydroelectric industry. It was later converted into a government-owned stock corporation by Republic Act 2641 in 1960. Its charter was revised under Republic Act 6395 in 1971. 

While consolidating significant influence over the Philippine electricity market, this monolithic structure came with its pitfalls. 

NAPOCOR accumulated substantial debt due to a combination of over-expansion, mismanagement, political interference, and corruption. 

The corporation's financial stability was further undermined by subsidies, price controls—both contributing to market imbalances—and costly contracts with Independent Power Producers (IPPs), which led to a cycle of financial losses. 

In response, the Electric Power Industry Reform Act (EPIRA) of 2001 was enacted, marking the beginning of the sector's restructuring through privatization. 

The Power Sector Assets and Liabilities Management Corporation (PSALM) was created to manage the sale and privatization of NPC's assets, also assuming NPC's liabilities and obligations.

Figure 1

At its peak, NAPOCOR’s debt, as reported by PSALM, had reached 1.24 trillion pesos by 2003. (Figure 1) 

The National Transmission Corporation (TRANSCO) was established to manage the transmission facilities and assets previously under NAPOCOR.

This restructuring ultimately led to the formation of the National Grid Corporation of the Philippines (NGCP) in 2009, a consortium that included local business tycoons Henry Sy Jr. and Robert Coyiuto Jr., along with China’s state-owned enterprise, the State Grid Corporation of China (SGCC). NGCP assumed operational control of the country’s power grid. 

The key takeaway from NAPOCOR’s experience is that its monopolistic structure created and fostered inefficiencies, corruption, and imbalances, which culminated in massive debt. 

Despite the privatization, NGCP remains a legal monopoly. 

Once again, NGCP operates and maintains the transmission infrastructure, such as power lines and substations, that connects power generation plants—including those owned by NAPOCOR and private generators—to distribution utilities. 

III. Geopolitical Tensions Permeate the Power Sector 

The current Philippine administration's foreign policy can be viewed through the lens of U.S. influence. 

Evidenced by hosting four additional bases for access to the U.S. military in 2023 amidst ongoing maritime disputes in the South China Sea, this stance marks a contrast with the previous Duterte administration's more China-friendly policies. 

This foreign policy shift has also been manifested in actions such as the banning of Philippine Offshore Gaming Operators (POGOs) and the legal actions against Ms. Alice Guo, a former provincial (Tarlac) mayor accused of espionage and involvement in illegal gambling. 

These tensions extend to the NGCP, where the Chinese stake has been cited by media and officials as a national security risk.  

According to a US politically influential think tank, "Fears in both Manila and Washington that Beijing could disable the grid in a time of crisis have lent urgency to efforts to reform its ownership and operational structure". (CSIS, 2024) 

Therefore, heightened scrutiny of China’ government involvement in sectors like NGCP, justified on the ‘kill switch’ or national security risk, combined with increasing military cooperation with the U.S., suggests a Philippine foreign policy trajectory heavily influenced by Washington's strategic objectives. 

IV. MIC’s Investment in NGCP: A Revival of Economic Nationalism? Shades of Napocor?

The stated objectives of MIC’s entry into NGCP through a 20% stake in SGP are twofold: 

A. Advance National Security by Strengthening Oversight of NGCP Management? 

MIC contends that this investment allows for governmental oversight of NGCP management, potentially counterbalancing foreign influence, particularly from China. They have also expressed interest in acquiring the entire SGCC’s stake. 

However, this approach risks "political interference," one of the critical factors that historically plagued the National Power Corporation's (NPC) financial stability. 

Furthermore, a move towards re-nationalization could represent a regressive step, potentially leading to deep financial losses reminiscent of NPC’s past.

B. Economic Benefits: Lowering Electricity Costs by Enhancing Grid Efficiency?

MIC has promoted the investment as a means to improve grid infrastructure, with the expectation that efficiency gains would eventually translate into lower electricity rates for consumers.

First, the latter objective appears secondary to the former. Since all government actions must be publicly justified, MIC’s interventions are presented as beneficial to the consumer.

Figure 2

The Philippines is often cited as having one of the highest electricity rates in Asia. (Figure 2, upper chart) 

However, subsidies on power firms have distorted this metric. The NPC’s subsidy program significantly contributed to its debt accumulation.

Similarly, the government’s attempt to regulate fuel prices via the Oil Price Stabilization Fund (OPSF) ended up as a net subsidy, requiring large bailouts, as noted by the International Institute for Sustainable Development (IISD, 2014). 

In short, Philippine experiences with subsidies have historically been unsuccessful. 

It is also questionable whether dependency on energy imports directly equates to high electricity prices. (Figure 2, lower image)

This simplistic logic would lead to the conclusion that nations that are most dependent on oil and energy imports would have the highest electricity rates, which is not necessarily true—because of many other factors. 

Second, MIC argues that "investing in NGCP could improve the rollout of transmission grid infrastructure, allowing more power players to supply energy to the grid."  

While this proposal is ideal in theory, its practical implementation faces significant challenges. 

One of the primary drivers behind high energy costs is the oligopolistic market structure, characterized by a concentration of power among a few large conglomerates.

Figure 3 

The most prominent players include San Miguel Corporation (PSE: SMC), Aboitiz Power Corporation (PSE: AP), First Gen Corporation (PSE: FGEN), and Manila Electric Company (PSE: MER). In Luzon, for example, seven generation companies hold an estimated 50% of the total installed capacity. (ADMU, 2022) (Figure 3) 

Despite partial deregulation, the concentration of market power among these firms potentially reduces competitive pressures and limits market alternatives, leading to price-setting behaviors that do not reflect true supply and demand dynamics. 

The Wholesale Electricity Spot Market (WESM) was introduced in 2006 to foster competition, yet allegations of anti-competitive behavior emerged soon after its inception. 

Moreover, while EPIRA led to privatization in segments of the industry, the slow pace of implementing reforms, such as open access provisions and retail competition, has maintained high electricity prices, as highlighted in a World Bank study. 

Furthermore, the incumbent regulatory framework, despite its intent to limit market power, has not fully mitigated oligopolistic tendencies, resulting in persistently high prices for consumers. Examples: Bureaucracy and red tape, cross ownership, system losses, conflicting laws, over-taxation and more. 

As a result, the oligopolistic market structure and high energy costs deter foreign direct investment (FDI), as investors seek markets with lower operational costs. 

The likely substantial influence of these oligopolists on the political sphere, which protects their interests through legal frameworks, raises the risks of collusion, cartel-like behavior, and barriers to entry, thereby constraining competition.

Therefore, while MIC’s argument for infrastructure rollout benefiting consumers through competition is necessary, it is crucially insufficient. 

Market concentration among large firms may have significant influence on regulations and their implementation, particularly in the upstream and midstream segments (generation, transmission, and distribution). 

The slow pace of reforms aimed at fostering a competitive environment has severely limited efficiency gains, and consequently, the reduction of electricity rates. 

Third, the Bangko Sentral ng Pilipinas’ (BSP) low interest rates regime has enabled these firms to accumulate substantial or large amounts of debt to finance their commercial operations, which implicitly creates obstacles for competitors unable to access cheap credit. 

Alternatively, this debt accumulation poses systemic financial and economic risks. 

In essence, despite EPIRA and its privatization efforts, monopolistic inefficiencies coupled with readily available cheap credit have effectively transferred NPC’s debt dilemma to the oligopoly. 

Lastly, decades of easy money policies from the BSP have driven a demand boom, resulting in a significant mismatch in the sector’s economic balance. This is evident in overinvestment in areas like real estate, construction, and retail, potentially diverting resources from necessary energy infrastructure and even potentially leading to overinvestment in renewable energy sources at the expense of reliable baseload power from coal, oil, natural gas, and nuclear energy. 

In sum, prioritizing the expansion of a competitive environment where the sector’s pricing reflects actual demand and supply dynamics is essential. 

Liberalization, which should lower the hurdle rate, would intrinsically encourage infrastructure investment without the need for political interventions. 

MIC’s promotion of economic gains from its interventions appears more as a "smoke and mirror" justification for politically colored actions. 

V. Maharlika's NGCP Investment: A Bailout in Disguise? Potentially Inflating an SGP Stock Bubble?" 

An even more fascinating perspective is SGP's financial health. 

Certainly, as a legal monopoly, the National Grid Corporation of the Philippines (NGCP) holds a significant economic advantage—an economic moat. 

Grosso modo, SGP, as the majority shareholder of NGCP, seemingly operates within a rent-seeking paradigm, where wealth is accumulated not through value creation but through leveraging of economic or political environments to secure favorable positions. 

OR, for monopolists, the focus shifts from open market competition, innovation, or improvement, to maintaining their monopoly status by currying favor with political stewards. Subsequently, they leverage this privilege to extract economic rents, often at the expense of consumers or other market participants. 

SGP’s financials and recent developments appear to support this narrative.

Figure 4

Revenue Stagnation: Since Q3 2022, SGP's quarterly revenue has grown by an average of 5.9% over 13 quarters through Q3 2024, with a Compound Annual Growth Rate (CAGR) of only 0.52% since Q3 2020. 

Slowing Profit Trends: During the same periods, quarterly profits expanded by 2.67%, but shrank by 2.25% based on CAGR. 

Notably, a spike in net income in Q2 2022 was attributed to "higher iMAR as approved by ERC effective January 1, 2020 and the recording of Accrued revenue for incremental iMAR 2020 for CY 2020 and 2021." 

iMAR Explanation: As per Businessworld, "iMAR stands for "Interim Maximum Annual Revenue," which refers to the maximum amount of money a power transmission company like the National Grid Corporation of the Philippines (NGCP) is allowed to earn annually from its operations, as approved by the Energy Regulatory Commission (ERC) during a specific regulatory period; essentially setting a cap on how much revenue they can collect from electricity transmission services"

Figure 5

Mounting Liquidity Issues: SGP's cash reserves have been contracting, with an average decrease of 3.9% over 13 quarters through Q3 2024 and a -6.7% CAGR since Q3 2020. 

Surging Debt Accumulation: Conversely, debt and financing charges have escalated. Debt has grown by an average of 12.1% over 13 quarters, with a 2.1% CAGR, while financing charges increased by an average of 5.7% with a 1.9% CAGR. 

SGP’s finances are not exactly healthy. 

Yet NGCP’s recent activities gives further clues. (bold mine) 

ABS-CBN, May 23, 2023: "The National Grid Corporation of the Philippines on Thursday said it was not to blame for delayed projects, and fended off criticism that it was making consumers pay even for delayed projects. The country’s power grid operator also insisted that power transmission improved since it took over operations from the government. A recent Senate hearing found that 66 projects, of which 33 were in Luzon, 19 in the Visayas, and 14 in Mindanao, remained unfinished. " 

ABS-CBN, December 23, 2024: "The Energy Regulatory Commission (ERC) has imposed a total of P15.8 million worth of fines on the National Grid Corporation of the Philippines (NGCP) over "unjustified delays" in 34 out of 37 projects. "

SGP’s tight finances, mainly evidenced by stagnant revenues, declining profits, and deteriorating liquidity, could reflect the challenges faced by NGCP. 

Further, despite the complex political nature of the operations of the grid monopoly, the ERC caps the revenue that NGCP is allowed to generate (Php 36.7 billion annually). 

This limits NGCP’s financial health, potentially leading to liquidity strains and increased borrowings by SGP to finance their projects. 

Fundamentally, his dynamic might resemble a high-stakes path towards Napocor 2.0. 

Besides, the Department of Energy (DoE) sets the plans and policies, while NGCP, as the exclusive franchise holder, is in charge of the operation, maintenance, development, and implementation of projects for the country's power transmission system. 

The ERC regulates and approves rates, monitors performance, and can impose penalties for delays or inefficiencies. 

In short, since NGCP prioritizes fulfilling the administration's political agenda, it seemingly does so with little concern for consumers—does this reflect the rent-seeking paradigm? 

This raises two crucial questions: aside from economic nationalism, could MIC’s entry into NGCP amount to an implicit BAILOUT of SGP? 

And could this package include a deal for China’s SGCC to exit? 

While we are not privy to the legal technicalities leading to MIC’s initial investment in NGCP via a 20% stake in SGP, SGP’s share prices have experienced a resurgence, or spike, since hints of MIC’s entry began to emerge late last year. 

Year-to-date (YTD) returns of SGP shares totaled 17.6% as of February 7th. 

Once again, this raises additional questions:

Figure 6

-Is a stock market bubble being inflated for SGP shares, benefiting not only corporate insiders and their networks, but also political figures and their allies behind the scenes? 

-Considering the price plunge of SGP shares from over 700 in 2017 to the present, resulting in substantial losses for its shareholders, could this potential bailout include efforts to pump up SGP shares to recoup at least a significant portion of these deficits? 

VI. Maharlika’s Risks and Potential Consequences 

The paramount concern revolves around what might happen if MIC's investment, re-nationalization, or its policy of economic nationalism regarding NGCP goes awry. 

What if NGCP replicates the pitfalls of its predecessor, the National Power Corporation (NPC)? How would the resulting losses or deficits be managed? 

Maharlika's investment capital is derived from public funds. If MIC incurs losses, would additional taxpayer money be on the line? Would there be a necessity for a bailout of MIC itself? 

How would potential deficits from MIC affect the country's fiscal health? Could this lead to higher interest rates and a weaker peso, exacerbating economic pressures? 

VII. Conclusion 

Ultimately, Maharlika's NGCP investment, executed through SGP, reflects a tension between seemingly conflicting objectives: securing national security interests and generating optimal returns. 

While proponents tout the deal as a means to lower electricity costs and improve grid efficiency, our concern—given SGP's financial weaknesses—is that MIC’s infusion could, in effect, function as a bailout. 

That is to say, the potential exposure of public funds through the SWF for political goals may conflict with, or potentially override, the Maharlika Investment Corporation’s stated goals: "to ensure economic growth by generating consistent and stable investment returns with appropriate risk limits to preserve and enhance long-term value of the fund; obtaining the best absolute return and achievable financial gains on its investments; and satisfying the requirements of liquidity, safety/security, and yield in order to ensure profitability of the GFIs’ respective funds." 

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references 

Harrison Prétat, Yasir Atalan, Gregory B. Poling, and Benjamin Jensen, Energy Security and the U.S.-Philippine Alliance, Center for Strategic and International Studies, October 21, 2024 

Maria Nimfa Mendoza Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in the Philippines, March 2014, IISD.org p. iv 

Majah-Leah V. Ravago, The Nature and Causes of High Philippine Electricity Price and Potential Remedies, January 19, 2022 Ateneo de Manila University

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

  

The government pretends to be endowed with the mystical power to accord favors out of an inexhaustible horn of plenty. It is both omniscient and omnipotent. It can by a magic wand create happiness and abundance. The truth is the government cannot give if it does not take from somebody—Ludwig von Mises 

In this issue

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

I. The GDP’s Critical Defects

II. The Mainstream Narrative is Failing

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption?

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP

XI. Summary and Conclusion

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen 

Q4 and 2024 GDP were another big miss for the establishment. Government spending played a pivotal role in boosting growth, while consumers were sidelined. There is little awareness that the former indirectly causes the latter 

I. The GDP’s Critical Defects 

Inquirer.net January 31, 2025: The Marcos administration missed its growth target for the second straight year in 2024, falling below consensus after the onslaught of destructive typhoons had muted the typical surge in economic activities during the holiday season. Gross domestic product (GDP), the sum of all products and services created within an economy, expanded at an average rate of 5.6 percent for the entire 2024, the Philippine Statistics Authority (PSA) reported on Thursday…At the same time, last year’s performance failed to meet market expectations after settling below the median estimate of 5.8 percent in an Inquirer poll of 12 economists…The statistics agency reported that GDP had expanded by 5.2 percent in the fourth quarter, unchanged from the preceding three months and lower than the year-ago print of 5.5 percent. That was also below the median forecast of 5.8 percent. 

Our preface: the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus or Marcos-nomics. 

Despite this, the Philippine GDP registered 5.2% in Q4 and 5.6% in 2024. 

Although GDP provides insight into how economic output is distributed across sectors—categorized by expenditure and industry—it does not present the equivalent allocation of spending by income class. 

Therefore, it is arguable that the headline figure makes a critically flawed assumption by suggesting that the statistical spending growth applies to the average. 

In other words, it assumes that the average citizen has experienced 5.2% growth in Q4 and 5.6% growth overall. The question, however, is how do you aggregate the spending of a few billionaires with that of those living in poverty? 

And this applies to the inflation deflator used to calculate the headline figure as well: How accurate is it to derive an average inflation rate from a mishmash of diverse spending items like a mobile gaming subscription, rice, and vehicle wheels? 

Apples and oranges, you say? Exactly.

If the nominal GDP and the deflator are flawed, why should we trust that the headline estimates reflect reality?

II. The Mainstream Narrative is Failing 

Every start of the year, mainstream experts proclaim at the top of their lungs that GDP will align with sanguine government targets. Some even tout the likelihood of the economy reaching "middle-income status."

Beyond abstract reasoning, they rarely explain the mechanics of how they arrive at their estimated figures.

Either they ignore the data provided by the Philippine Statistics Authority (PSA), or their forecasts are based on a 'pin-the-tail-on-the-donkey' approach—bluntly put, faith in magic.

What does the PSA data reveal?

Figure 1

It shows that since the post-pandemic recession, GDP has operated within a secondary trendline. This means that despite occasional growth spikes, GDP growth will be SLOWER than in the pre-pandemic era. (Figure 1, topmost pane)

Using the exponential trend as a gauge, we see that Q4 GDP consistently exceeds the trendline but eventually retraces to the secondary support in the following quarters.

The same dynamic applies to the 2024 GDP. (Figure 1, middle graph)

The point having been made, realize that for GDP to meet the mainstream's numbers, it would require a significant breakthrough not only to reclaim the pre-pandemic trend but also to sustain it.

From a statistical standpoint, none of this is happening. Even the PSA’s chart reinforces the notion of a slowing GDP. (Figure 1, lowest chart)

Figure 2 

As evidence, the government has struggled to wean itself off debt-financed pandemic deficits relative to GDP, which have served as a quasi-stimulus. Data reveals that they have become addicted to it. (Figure 2, topmost image) 

Why, then, do they yearn for pre-pandemic GDP figures? 

Incredible.

Statisticians-cum-economic experts often don't disclose that their perpetually optimistic forecasts might be about placating or bootlicking the government.

Why? For business and personal reasons. They might want to secure government contracts, underwrite debt issuance, intermediate stock trading, or gain accreditation as credit appraisers, among other things. On a personal level, they seek social desirability or good standing with officials for career advancement (revolving door politics), off-table deals, etc. In short: the principal-agent dilemma.

Essentially, overstating GDP or understating CPI numbers, or the mainstream's erroneous forecasts, come with no consequences for them—they have no "skin in the game."

However, for many in the investing public, consensus projections guide corporate strategies or investments in financial markets.

It’s unsurprising, then, that in addition to distortions in capital goods pricing due to stock market mispricing, overly optimistic guidance often leads to “build-and-they-will-come” debt-fueled malinvestments.

Many also invest their hard-earned savings in financial markets (stocks or fixed income) in the hope of achieving real or inflation-adjusted positive returns, without realizing that their investments are silently transferring wealth to politically connected economic elites, who are absorbing unsustainable amounts of debt.

And remember the inflation spike of 2022? NONE of these experts saw it coming.

In clear words, forecasts based on the principal-agent problem will likely keep the public blind to the escalating risks of a crisis.

Here's an example:

Businessworld, January 24: PROPERTY developers in the Philippine capital need to enhance their market research and consider lowering condominium prices to address the current “mismatch” between available units and buyer demand, according to property analysts. “These overpriced condos aren’t matching with the existing buyers…There are so many buyers, as in we’re talking millions of buyers, but the issue is they cannot afford [a condo in Metro Manila] anymore” (bold added) 

The mainstream’s narrative is failing: Expect more to come. 

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption? 

Let's conduct a brief investigation into the PSA's GDP data. 

The government's statistics are riddled with paradoxical figures.

First, the government claims that the employment rate (as of November) has reached nearly its highest level. (Figure 2, middle chart)

Curiously, with low savings, how have entrepreneurs managed to fund investments in real businesses, leading to near-full employment?

FDI numbers hardly support this. Despite a spike in October, the 10-month FDI flow was up by only 6.6%, with 68% of those inflows coming from debt. Debt inflows are no guarantee of “investment.”

The likely source of funds might be from banking loans. Over an 11-month period, consumer credit captured the largest share of the net increase in Universal-Commercial Bank loans at 23%, followed by real estate at 18.74%, electricity at 9.72%, and retail trade at 9.52%.

However, retail and agriculture, which account for the largest shares of the working population at 21.3% and 20% respectively, suggest a different story.

Next, fueled by credit cards and salary loans, consumer credit continues to grow at a breakneck pace, setting nominal records consecutively. (Figure 2, lowest graph)

Ironically, despite full employment and unprecedented consumer credit growth, Q4 2024 saw real consumer spending in GDP terms increase by only 4.7%, similar to Q2 and marking the second lowest since Q2 2011, excluding the period of the pandemic recession.

Stagnating household consumption was a key factor in pulling down the period's GDP.

Moreover, household GDP mirrored the deceleration in Q4 2024, with consumer per capita GDP growth at just 3.8%—the lowest since Q3 2017.

Important questions arise: 

-Where did all that record bank credit expansion go?

-How much of the consumer credit growth has been about refinancing existing debt?

-If productivity has been driving the GDP, why would a nation with full employment experience a sustained slowdown in household consumption?

In this context, government data on employment appears questionable.

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

Figure 3

What’s more, households are struggling with consumption, mainly due to the inflation tax, which continues to erode their spending power. At the same time, they are using leverage to maintain their lifestyles. As this occurs, retail GDP continues to outgrow consumer spending. (Figure 3, topmost window)

Partly due to the mainstream’s constant cheerleading, retail entrepreneurs are hopeful that the consumption slump will reverse soon, and so have been aggressively expanding capacity. Retail GDP grew by 5.5% in Q4 and has outpaced consumer spending in 3 of the last 4 quarters. (Figure 3, second to the highest image)

Or, to put it simply, because of the mainstream belief in the 'build it and they will come' dogma, supply continues to outpace demand.

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

In the meantime, news reports that "the House Committee on Labor and Employment has approved a bill for a P200 across-the-board legislated wage hike."

Would this not function as a form of redistribution or a protective moat in favor of elite companies, at the expense of micro, small, and medium enterprises (MSMEs)? How would this incentivize grassroots entrepreneurship when authorities are effectively raising the cost of doing business or barriers to entry?

How would minimum wage laws not negatively impact consumption and productivity while acting as a drain on savings?

Quoting economist Thomas Sowell, "Minimum wage laws play Russian roulette with people who need jobs and the work experience that will enable them to rise to higher pay levels." (Sowell, 2006)

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

And there’s more. How does the 5.2% GDP square with polls showing record highs in consumer stress: "Self-Rated Poverty at 63%, highest in 21 years" and "December 2024 hunger was… at the highest level since the record high 30.7% during the COVID-19 lockdowns in September 2020"? (Figure 3, second to the lowest and lowest charts)

While the government touts the 5.2% GDP, SWS found that 63% of Filipino families rated themselves as "Poor," while "25.9% of Filipino families experienced involuntary hunger."

Simply put, this reflects popular sentiment about inflation: a vast majority of the population feels harried by the peso’s loss of purchasing power, and a quarter of them have actually experienced hunger.

Incredible.

So, who is overstating their data—SWS or the government?

Here’s the thing: If the GDP growth is based on unsustainable leveraging, what would the ramifications be?

Or if consumer balance sheets have been burdened by excessive gearing (spend-now, pay-later) to cope with inflation, how would this affect the economy?

When consumers reach the proverbial tipping point of leveraging and begin to scale down, wouldn't this slow the GDP? Wouldn't credit delinquencies rise, affecting the banks' already strained liquidity?

Or, wouldn’t this reduce lending, exacerbating liquidity pressures in the banking system and increasing defaults?

Could this not lead to rising unemployment, creating a feedback loop that slows GDP, decelerates bank lending, and drives up credit delinquencies?

By the same token, what happens to the supply side’s debt-financed overcapacity? Wouldn’t this worsen pressures on unemployment, output, consumer spending, and negatively affect the health of the banking industry?

Wouldn't increasing sentiments of hunger and perceptions of poverty not lead to higher risks of social disorder? 

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction 

If household consumption weighed down the GDP, which sectors propelled it upwards?

Figure 4

From the expenditure side of the data, the answer is the government, construction, and export services. 

Government GDP rose from 5% in Q3 to 9.7% in Q4. While construction GDP dipped from 8.8% to 7.8%, it still exceeded the 5.2% threshold. Private sector construction, driven by households (12.8%) and corporations (5.7%), powered the sector’s GDP, while government construction GDP stagnated at 4.7%. (Figure 4 topmost diagram)

Interestingly, while exports of goods entered a recession, declining by -0.37% in Q3 and -4.6% in Q4, services exports GDP surged from 2.3% to 13.5%, elevating the sector's performance from -1.4% in Q3 to 3.2% in Q4. (Figure 4 middle image) 

Curiously, real estate services firm CBRE reported in 2024 that "32 percent of vacated (office) spaces are from the IT-BPM sector." Why have service export firms like BPOs been downsizing if their businesses were reportedly booming, as suggested by the GDP figures? 

Meanwhile, gross capital formation fell sharply from 13.7% in Q3 to 4.1% in Q4, while durable goods GDP also plunged from 7.9% to just 0.1%. Unfortunately, this indicates a sluggish state of investments, which contrasts with the employment data. 

The expenditure side of the GDP shows that government spending was primarily responsible for the Q4 GDP boost, supported by services exports and private sector construction. However, it also reveals that while consumer spending has stagnated, capital spending has languished. 

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors 

On the industry side, sectors like transport (9.5%), financial and insurance (8.5%), professional and business services (8.3%), public administration and defense (7%), education (6.2%), and health (12.1%) all grew above the GDP rate. 

Or, to put it another way, outperforming government and related sectors contributed about 10% of the industry's GDP. 

After the 2020 spike, the share of public administration and defense in GDP remains elevated compared to pre-pandemic levels. This should come as no surprise, as the government is focused on centralization, partly driven by a subtle shift toward a war economy. (Figure 4 lowest graph)

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

Figure 5

On the other hand, despite showing signs of a slight slowdown in Q4 2024, the financial and insurance sector's contribution to national GDP continues to expand. (Figure 5, upper chart) 

It's not coincidental that the sector's improvements coincided with the BSP's unprecedented sector rescue in 2020. Since then, the sector's growth has not looked back, even as the BSP raised interest rates. That is, the sector’s GDP suggests that there was no tightening at all. 

In Q4, banks accounted for 49% of the sector's GDP, while non-banks and insurance had respective shares of 32% and 13.33%. These sectors posted GDP growth rates of 8%, 8.4%, and 8.2%, respectively. 

Yet the paradox lies in the sector's dependence on the real economy, as it lends and invests to generate profits and contribute value to GDP. 

Real estate, trade (primarily retail), and manufacturing are among their largest borrowers, accounting for 40% of total bank lending as of last November. 

Lending to the financial sector itself accounted for a 7.7% share, which together with the aforementioned sectors, totals 48.5% of all bank loans (from universal commercial, thrift, and rural banks). 

Incidentally, these sectors are also significant contributors to the GDP, making up a 42.7% share of the national GDP. Including the financial sector, the aggregate GDP increases to 52.5%. 

Aside from retail, the manufacturing sector posted a real GDP growth of 3.1%, while real estate GDP materially slowed to 3.0%, pulling its share of the national GDP to an all-time low! (Figure 5, lower diagram) 

We previously discussed the sector's deflationary spiral, and the Q4 decline could signal further price drops in the sector. 

To illustrate the struggles of the manufacturing sector, JG Summit announced the shutdown of its Petrochem business last week, in addition to the goods export recession in Q4. 

To summarize, the Philippine GDP and bank lending exposure reveal an increasingly fragile economy heavily dependent on a few sectors, which have been buoyed by bank credit. This means that the higher the concentration risks, the greater the potential impact of an economic downturn. 

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP 

Another piece of evidence that consumer spending has been slowing can be found in the food and accommodation sectors' GDP. 

The authorities' response to the pandemic with economy-wide shutdowns initially pushed Food GDP into an upward spiral, while the reopening triggered a "revenge travel" GDP surge in the accommodation sector. 

However, the massive distortions caused by these radical political policies have started to unwind.

Figure 6

Accommodation GDP slowed from 12.2% in Q3 to 8.7% in Q4, while food GDP dropped from 10.1% to 4.9%. Since food accounts for a large portion (68%) of the sector, the overall GDP for the sector moderated from 10.7% to 6.1%. (Figure 6, topmost and middle charts) 

The distortions caused by pandemic policies have led many investors to believe that the 'revenge travel' trend, or the recovery streak in tourism, will continue, fueling massive investments in the sector. 

In our humble opinion, they have critically misread the market, as the growth rate of foreign tourist arrivals has substantially slowed in 2024. (Figure 6, lowest image) 

Moreover, the sector's declining GDP further highlights the weakening of domestic tourism. 

XI. Summary and Conclusion 

1 Q4 and 2024 have reinforced the secondary trendline in GDP, continuing to show a slowdown in GDP growth.

2 Dwindling consumer spending has been a critical factor driving this slowdown.

3 Importantly, capital spending growth has also been lackluster.

4 Conversely, government spending has provided crucial support to GDP, along with contributions from other ancillary sectors.

Yet, these dynamics reveal that the Philippines operates under the flawed assumption of political "free lunches" — where government spending is seen as having only a positive impact, while ignoring the negative effects of the crowding out syndrome. 

They also highlight the pitfalls of the BSP's 'trickle-down' policies, which have deepened concentration risks due to the bank-dependent financing of a few sectors. 

It’s no surprise, then, that after the initial easing by the BSP in the second half of the year — which contributed to the dismal Q4 GDP, the January 2025 PSEi 30 crash and rising bond yields, the BSP proposes to continue the same strategy, slashing rates by 50 basis points and reducing reserve requirements by 200 basis points. 

Succinctly, they are "doing the same thing and expecting different results."

____

references 

Thomas Sowell, A Glimmer of Hope August 08, 2006, realclearpolitics.com 

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The stock market's job is to always make you feel like you are missing out on something. The stock market's job is to always make you feel like you should be doing something. The stock market's job is to get you to do the wrong thing at the wrong time—Ian Cassel

In this issue 

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

I. A Lowly Voice in the Wilderness

II. January as Template for 2025 Performance

III. Double Top Pattern?

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

VI. Summary and Conclusion

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The Philippine equity benchmark plummeted 10.2% in January, making it the worst performer in Asia. It was also the largest loss in the history of January since 2008. Could escalating liquidity strains be the driving force?

I. A Lowly Voice in the Wilderness 

First, the appetizer. 

Let’s revisit a few quotes from our previous posts when everyone was predicting a new bull market for the PSEi 30, with expectations of it reaching 7,500 in October. (bold and italics original) 

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system. August 4, 2024 

...

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals 

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment. September 15, 2024

... 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows.  

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up. October 7, 2024 

...

Given the current global and domestic economic imbalances, the Year of the Snake may again usher in another period of heightened risk and potential volatility. January 19, 2025 

Next, the main course.

II. January as Template for 2025 Performance

The Philippines' main equity benchmark, the PSEi 30, plunged by 4.01% on the last trading day of January, dragging its weekly return to -6.9%, marking its fourth consecutive week of decline.

Figure 1

For the month, the PSEi 30 suffered a 10.2% loss Month on Month (MoM), its most significant monthly decline since the 12.8% crash in September 2022. Annually, it was down by 11.8%.

January is supposed to be the best month for the PSE, rising 9 times in 13 years, with an average return of 0.94%, including 2025.

Yet, returns have been declining both monthly and annually for the past decade and so. (Figure 1, upper window) 

True to the volatility of the Snake Year, 2025's 10.2% plunge on January 10 was the worst since 2008, during the Great Financial Crisis, which resulted in a 48% decline and the lowest PSEi 30 level since 2012. (Figure 1, lower image) 

Yet, if history were to rhyme, and if January’s performance serves as a template for 2025, it wouldn’t be surprising if the PSEi 30 faces a substantial setback.

Figure 2

As a result of this week’s thrashing, the Philippine PSEi 30 was the worst-performing Asian bourse. Ten of 19 national indices were down, one remained unchanged, with average returns at -0.41%. (Figure 2, topmost graph)

For January, with 10 of 19 national indices down and a YTD change of -0.5%, the Philippine PSEi 30 was the region's laggard. (Figure 2, middle chart)

Major ASEAN bourses, such as Thailand’s SET and Malaysia’s KLCI, were the weakest links in both weekly and monthly outcomes. (Figure 2, lowest diagram)

Could these be emerging signs of an Asian Financial Crisis 2.0?

III. Double Top Pattern? 

This week’s meltdown breached two minor support levels and now seems poised to challenge the October 2022 low.

Figure 3

From a technical analysis standpoint, the PSEi 30 is facing the potential of a 'double top' pattern, where a breakdown below the October low could lead to a retest of the March 2020 level. (Figure 3, upper image)

The panic selling suggests that a significant oversold rebound might be imminent, though the durability of this recovery could be suspect.

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

Mainstream explanations for the selloff have often been influenced by the availability bias or "when people overweight new information or recent events" (Investopedia)

Could the recent sell-offs be attributed to the substantial shortfall in Q4 and 2024 GDP (a development we had anticipated)? 

Was it influenced by Trump's tariff threats or the Federal Reserve's pause in their easing cycle? 

Or might domestic politics play a role? Specifically, the threat by the BBM administration to shut down the government if the Supreme Court rules in favor of appellants challenging the constitutionality of their controversial budget, or the impending Food Emergency Security measure on rice, set to be implemented on February 4, 2025. 

Our best guess is that while these factors might have some influence, a more critical driver of the market turmoil could be the escalating pressures on financial liquidity. 

Unlike the 2022 episode, where inflation and rising interest rates were significant factors, the current scenario mirrors the dynamics of the pandemic recession—where the PSEi 30 declines despite monetary easing aimed at combating a recession. (Figure 3, lower graph)

Currently, the GDP growth rate has been decelerating.

Figure 4

Moreover, bank liquidity has been worsening as of November, due to investments in Held-to-Maturity (HTM) assets and undisclosed Non-Performing Loans (NPLs). The cash-to-deposits and liquid assets-to-deposits ratios have been on a long-term downtrend, with the former at its lowest level in over a decade. (Figure 4, topmost graph) 

As a reminder, the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus. 

Contrary to mainstream expectations, the BSP’s accommodative monetary policy has led to an increase in Treasury bond yields rather than a decrease. (Figure 4, middle image) 

This rise is influenced not only by the Federal Reserve's policies but also by domestic inflation, which has been incrementally rising. 

Additionally, the yield curve for local Treasuries has steepened significantly, indicating heightened inflation risks. (Figure 4, lowest chart) 

Lastly, San Miguel’s deviation from the recent market uptrend might have served as the canary in the coal mine, signaling potential broader market distress. 

Also from last October 7, 2024 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph)  

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?    

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors?

Figure 5

San Miguel’s share price was one of the biggest casualties, diving below the panic levels of March 2020.  (Figure 5, upper window) 

Its market capitalization plunged to Php 155 billion while grappling with a debt of Php 1.477 trillion. Falling equity and rising debt—what could go wrong? 

Could there be domestic funds facing liquidity constraints, forced to raise cash quickly by selling at any price?  And has this liquidation exacerbated San Miguel’s financial dilemma?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

Lastly, the reconstitution of the PSEi 30 has contributed to market volatility.

The inclusion of AREIT and China Banking Corporation (CBC), which will replace Wilcon (WLCON) and Nickel Asia (NIKL) effective February 4, 2025, resulted in steep declines for the outgoing stocks: WLCON fell 10.16%, and NIKL plummeted 30.2%. (Figure 5, lower graph)

Meanwhile, funds tracking the PSEi 30 rotated into CBC (+33.81%) and AREIT (+4.74%).

Figure 6

Fundamentals hardly explain the irrational share price behavior of the affected firms. 

CBC’s parabolic move has turned it into a meme stock or crypto, even as the share prices of its peers have tumbled.

In the meantime, it also doesn't explain the sharp drop in NIKL's price. Although nickel prices have been on a downtrend, they have not collapsed. (Figure 6 topmost pane)

Shares of competitors FNI and MARC were down 1.96% and 8.96%, respectively, WoW. (Figure 6, middle graph)

In short, the PSE's proclivity to chase top performers while discarding laggards has only amplified the price distortions within the PSEi 30. 

VI. Summary and Conclusion

The January 2025 meltdown has brought to light the deteriorating fundamentals underlying the Philippine financial markets and economy. 

This crisis is not isolated to the Philippine Stock Exchange (PSE) but also resonates with some ASEAN counterparts. Could this be emerging signs of Asian Crisis 2.0? 

If historical trends of January and the volatility associated with the Year of the Snake are to repeat themselves, and if the double top pattern materializes, this suggests a significant deficit or loss for the PSEi 30 by the end of 2025. 

Could the recent turmoil in the PSEi 30 be indicative of escalating liquidity pressures among domestic fund managers? 

If this is the case, future stress could manifest in the treasury market and influence the US dollar-Philippine peso exchange rate $USDPHP. 

Certainly, given that the PSEi 30 has become heavily oversold, a notable rebound might be anticipated. However, this scenario presents not an opportunity for accumulation but rather for liquidation. 

Unless one is an expert in scalping, short-term trades involve significant risks (Figure 6, lowest chart)

Remember, cash remains the best defense against a bear market—whether through foreign exchange (FX) accounts or Treasury bills (T-bills).

___ 

Disclosure: The author holds a small position in NIKL as of the time of writing.