You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting). Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying—Ray Dalio
In this issue
Is the Philippines on the Brink of a 2025 Fiscal Shock?
I. A Brewing Fiscal Storm?
II. April 2025 vs April 2024: A Sharp Deterioration
III. Four-Month Performance: Weak Revenue Momentum
IV. Weak Revenue Despite Loose Conditions: A Structural Problem?
V. Budget Math: A Deficit Blowout in the Making?
VI. Economic Fragility Threatens Further Revenue Weakness
A. Manufacturing: Price Softening Amid Trump Tariff Volatility
B. External Trade: Consumer Import Growth Sharply Slows
C. Headline and Core CPI: More Evidence of Demand Weakness
D. Labor Market Deterioration, Hidden Labor Market Realities
VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain
VIII. The Looming Debt Burden: Financing a Widening Deficit
A. April Financing Activities
B. Debt Payment Dynamics
IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition
X. Crowding Out Effect and Interest Rate Pressures
XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing
XII. The Inevitable Path: Debt, Inflation, and Future Taxation
XIII. Conclusion: Fiscal Shock Watch 2025
Is the Philippines on the Brink of a 2025 Fiscal Shock?
April's budget surplus masks a deeper fiscal crisis brewing beneath record-high deficits and weakening revenue collection
I. A Brewing Fiscal Storm?
Is the Philippines teetering on the brink of a fiscal shock? We are about to find out after eight months of government data.
The Bureau of the Treasury’s April 2025 cash operations report confirms our suspicion that the government is struggling to meet critical fiscal targets, which should raise concerns about economic stability.
As noted in early May: "A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track." (Prudent Investor, May 2025)
The Inquirer.net reported on May 28, 2025: "The national government recorded a budget surplus of P67.3 billion in April, surging by 57.51 percent or P24.6 billion from a year ago, as tax revenues posted stronger growth and spending slowed for the month. However, for the January to April period, the cumulative budget deficit surged by 78.98 percent to P411.5 billion, as public spending rose by 13.57 percent to support economic activity and the priority programs of the Marcos administration."
Media narratives either echoed the official line on tax revenue strength or highlighted spending restraint as causes for April’s surplus. But both perspectives overlook a critical detail: April’s surplus aligns not just with the 2023 VAT filing shift to a quarterly basis (previously discussed) but—more importantly—with the "annual tax filing deadline"—a period typically associated with a revenue spike. Yet, even this failed to close the fiscal gap.
Additionally, the record-high deficits in Q1, persisting into the first four months, have gone largely unaddressed in mainstream discussions.
To cut to the chase: April data signals a further weakening in the revenue base—right in the face of unrelenting public expenditure, pushing the deficit to historic levels.
Let’s delve into the details to understand the scope of this fiscal challenge.
II. April 2025 vs April 2024: A Sharp Deterioration
In April 2025:
- Revenues fell 2.82%
- Tax revenues grew 7.84%
- Non-tax revenues plunged 68.08%
- Bureau of Internal Revenue (BIR) growth of 11.1% boosted tax revenues
- Bureau of Customs (BoC) 7.5% declined, which weighed on overall performance
Compare that to April 2024:
- Revenues soared 21.9%
- Tax revenues surged 13.9%
- Non-tax revenues rocketed 114%
- Tax revenues were anchored by BIR's 12.65% growth and the BoC delivered a strong 19.5%.
Clearly, April 2025 showed a sharp drop in performance despite the same structural advantages related to annual filings.
Figure 1
The nominal (peso) figures show revenue collections falling significantly short of April 2024's all-time high. (Figure 1, topmost window)
Relative to the VAT’s quarterly cycle, note that the combined January and April 2025 surpluses (Php 135.66 billion) exceeded 2024’s (Php 130.7 billion) by just 3.8%—barely moving the needle against the Q1 fiscal gap. (Figure 1, second to the highest image)
III. Four-Month Performance: Weak Revenue Momentum
For January to April 2025:
- Revenues grew a meager 3.3%.
- Tax revenues rose 11.5%, while non-tax revenues collapsed 51.94%.
- The BIR and BoC posted 14.5% and 2.16% growth, respectively.
In contrast, the first four months of 2024 showed:
- Revenues up 16.8%.
- Tax revenues up 13.22%.
- Non-tax revenues up 48.81%.
- The BIR and BoC grew by 15.35% and 6.47%, respectively.
Clearly, April 2025 didn’t just underperform—it dragged down the already fragile broader four-month revenue trend. (Figure 1, second to the lowest visual)
IV. Weak Revenue Despite Loose Conditions: A Structural Problem?
Critically, Q1’s collection performance coincided with the full effects of the BSP’s first easing cycle in 2024, while April began reflecting partial effects of the second phase.
Additionally, macro conditions were supportive:
- Bank credit growth was strong.
- Labor market conditions were reported as near full employment.
- Inflation slowed.
Universal-commercial bank loans jumped 11.85% in April to a record Php 12.931 trillion. Yet, public revenues stalled. (Figure 1, lowest graph)
In short, despite historically loose financial conditions, the government has already been experiencing collection issues—a potential symptom of diminishing returns from BSP’s easy-money regime.
This suggests that further monetary stimulus yields progressively smaller positive impacts on revenue generation or economic growth, potentially reflecting inefficiencies in credit transmission due to mounting balance sheet problems.
Which leads us to the trillion-peso question: What happens when financial conditions tighten?
V. Budget Math: A Deficit Blowout in the Making?
From January to April, total revenues reached Php 1.520 trillion. Annualized, that projects Php 4.561 trillion—assuming average monthly intake of Php 380.06 billion.
Compare that to the 2025 enacted budget of Php 6.326 trillion—already a base case considering six straight years of overspending. Authorities have already disbursed Php 1.932 trillion, implying a remaining monthly average of Php 549.28 billion.
Bluntly put: At the current pace, 2025 could register a deficit of Php 1.765 trillion—5.7% higher than 2021’s all-time high of Php 1.67 trillion!
The key difference? 2021’s deficit was a deliberate fiscal stabilizer—alongside the BSP's unprecedented monetary and regulatory measures—in response to the pandemic.
In 2025, no downturn has yet emerged—but the deficit itself threatens to trigger one.
VI. Economic Fragility Threatens Further Revenue Weakness
A. Manufacturing: Price Softening Amid Trump Tariff Volatility
Figure 2
Since its peak in July 2024, manufacturing loans have been decelerating. March growth was just 2%. However, PPI rose only 0.06% in April YoY—barely moving. (Figure 2, topmost pane)
Though manufacturing volume/value both rose 4.2–4.3% inApril, this likely reflected distortions from new Trump tariffs effective that month.
The S&P PMI index showed a similar spike to 53 in April but slumped to 50 in May. (Figure 2, second to the highest chart)
B. External Trade: Consumer Import Growth Sharply Slows
April imports fell 7.2%, while exports rose 7%, compressing the trade deficit by 26%. (Figure 2, second to the lowest diagram)
But consumer goods imports slumped from 25.8% in March to just 2.83% in April. (Figure 2, lowest graph)
Agri-based products—led by coconut and sugar—boosted exports.
C. Headline and Core CPI: More Evidence of Demand Weakness
Headline CPI slipped from 1.4% in April to 1.3% in May, mainly due to quasi-price controls known as Maximum Suggested Retail Prices (MSRP) on rice and pork. The government also began rolling out Php 20 rice subsidies in select areas, distributing them among targeted groups.
Figure 3
However, Core CPI (non-food and non-energy) steadied at 2.2% for a third straight month, backed by a base-forming month-over-month rate of 0.16%—marking a second consecutive month. A soft CORE CPI reflects underlying weakness in demand. (Figure 3, topmost image)
D. Labor Market Deterioration, Hidden Labor Market Realities
Labor data reveals further vulnerabilities. The unemployment rate rose from 3.9% in March to 4.1% in April, but this excludes an estimated 24 million “functionally illiterate workers” (47% of the labor force or 30% of the population aged 15 and above). Many of these workers are likely employed in the informal sector or MSMEs (67% of employment in 2023, per DTI) or are underemployed, part-time, or not in the labor force.
The “not in the labor force” population, defined by the PSA as those not seeking work due to reasons like housekeeping or schooling or permanent disability, has risen since November 2022, potentially masking the true unemployment rate and raises questions about the true extent of labor underutilization. (Figure 3, middle chart)
The correlation between universal-commercial bank consumer salary loans and CPI trend since 2021 highlights consumer strain, further eroding aggregate demand. (Figure 3, lowest diagram)
VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain
Amidst all of this, we must ask: what has happened to "aggregate demand," particularly consumer demand? If consumers have shown worsening strains at the start of Q2, its continuity bodes ill for GDP growth and could likely be expressed in potential shortfalls in tax collections.
So how will the government attempt to keep the GDP afloat? Given their top-down bias, the mechanical recourse would be to front-load public spending, thereby heightening the risks of a fiscal deficit blowout!
Naturally, because the government is not a wealth generator but rather a redistributor and consumer, someone has to finance that swelling deficit. That "someone" is the individuals in the wealth-generating productive private sector.
VIII. The Looming Debt Burden: Financing a Widening Deficit
Figure 4
With the first four-month deficit at a record high of Php 411.5 billion, authorities raised Php 155.61 billion in April, leading to a 190% spike in financing of Php 799.73 billion in 2025. This effectively reversed the three-year (2021-2024) decline previously hailed by mainstream experts as prudential management. (Figure 4, topmost window)
The financing surge increased BTr's cash reserves to Php 1.205 trillion (Jan-Apr), though authorities held net cash reserves of only Php 188.9 billion in April.
April's financing was mostly acquired through domestic issuance.
April debt payments soared 73.72% to Php 280.898 billion, accruing to Php 622.921 billion in the first four months of 2025. (Figure 4, middle image)
Total debt payments remained 45.7% below 2024's record levels. However, FX payments grew 17.3%, partly offsetting the 59.64% plunge in peso payments.
The FX share of debt servicing relative to the total has been rising since 2024. (Figure 4, lowest chart)
The lag in payment data may be due to scheduling issues or information deliberately withheld for political reasons.
While we find the preponderance of media announcements showing how debt payment has substantially slowed this year rather amusing, logic dictates that widening deficits will lead to a critical increase in debt that will have to be serviced over time.
IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition
April debt hit a record Php 16.753 trillion. Thanks to a strong peso, FX-denominated loans fell 2.7% or Php 142.33 billion.
Per Bureau of Treasury (BTr): "The reduction was primarily due to the P124.74 billion decrease in the peso value of external debt owing to peso appreciation."
However, domestic debt grew 1.85% or Php 211 billion, resulting in a net increase of 0.41% or Php 68.690 billion.
Reality Check: Philippine foreign debt did not actually shrink. The peso simply strengthened, lowering the debt's peso equivalent. Remember, FX liabilities still have to be repaid in dollars or other foreign currencies. In short, it's a revaluation trick—a statistical façade, not a real debt decrease.
X. Crowding Out Effect and Interest Rate Pressures
Figure 5
In any case, the widening deficit, brought about by the mismatch between accelerating public spending and weakening revenue growth, underwrites the escalation of public debt. The rise in public debt has already been outpacing the growth trend of public spending, driven by the deficit and likely by amortization requirements. (Figure 5, topmost pane)
This escalating fiscal deficit means that competition for access to the public's diminishing savings will intensify, as government requirements will likely crowd out the domestic credit needs of banks and non-private sector firms, thereby putting pressure on interest rates. For businesses, this translates to higher borrowing costs and reduced access to credit, potentially stifling private sector investment and job creation. For ordinary citizens, it could mean higher interest rates on loans for homes, cars, or personal consumption.
As an aside, the relentless rise in debt levels is not only a manifestation of the consequences of the government-BSP's "trickle-down" policies (debt-financed "savings-investment gap," "twin deficits," and "build and they will come" malinvestments); critically, they also signify the indirect ramifications of the Philippine social democratic system. In essence, this is what you have voted for!
XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing
So, despite authorities' earnest attempts to push down the CPI—mainly via price controls or Maximum Suggested Retail Prices (MSRP) for rice and pork—to accommodate a desired easing cycle, T-bill rates have barely budged since 2022! (Figure 5, middle chart)
T-bills, the most sensitive to BSP's rate cuts, have remained unresponsive to April's CPI data!
The widening spread between market (T-bills) and the CPI suggests that, aside from the crowding-out effect, Treasury markets view the present disinflation as "transitory," or they are hardly convinced of the integrity of the government's data.
Consider this: The punditry consensus has been clamoring for lower rates on the back of a slumping CPI, but treasury dealers for their companies continue to price Treasuries as if the CPI remains inordinately high!
In short, the crowding out has rendered the government-BSP's easing cycle ineffective: Fiscal stimulus has hit a wall due to diminishing returns!
At worst, the mounting discrepancy could translate into increasing policy risks—or a potential blowback—that could be expressed through an inflation surge or a USD/PHP spike.
As seen in banks' balance sheets, this crowding out has led to a plunge in their liquidity positions (evidenced by falling cash-to-deposits and liquid assets-to-deposits ratios).
This increasing demand for public savings also applies to foreign exchange (FX) requirements. This means that to meet the economy's foreign exchange (FX) requirements and support the BSP's "soft peg" or foreign exchange policy, a surge in external debt can be expected.
Evidently, public savings have not been sufficient. Authorities have increasingly relied on banks to finance public requirements via net claims on the central government (NCoCG), which have been rising in tandem with public debt. These assets have been siloed via banks' held-to-maturity (HTM) assets. The all-time high in public debt has been accompanied by a near-record NCoCG in April. (Figure 5, lowest diagram)
Figure 6
It is unsurprising that trades in government securities have been booming, even as 10-year yields have been on an uptrend. (Figure 6, topmost diagram)
This phenomenon suggests two things: potential disguised losses in banks and financial institutions, and second, that these trades have crowded out trading activities in the Philippine Stock Exchange (PSE).
In 2020, the BSP's historic Php 2.3 trillion intervention occurred partly via its own NCoCG, which is conventionally known as "quantitative easing." Although the present economy has supposedly ‘normalized,” the BSP's NCoCG remains at 2020 levels. This can be expected to surge when public savings and banks' capacity have reached their maximum. (Figure 6, middle image)
Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time.
We doubt if they can maintain the USD/PHP peg or if they would accommodate a limited peso devaluation.
XII. The Inevitable Path: Debt, Inflation, and Future Taxation
With this in mind, we can expect both public debt and debt servicing to experience an accelerated rise. Public debt to GDP could hit 2003-2004 levels, while debt servicing should see an equivalent uptrend over the coming years. (Figure 6, lowest chart)
We should not forget: rising public debt inevitably leads to higher debt servicing, which in turn necessitates more public spending.
As noted last May
This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted:
-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop.
-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures.
-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral.
-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation
-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)
Following this, after grappling with debt and inflation, the government is bound to raise taxes.
XIII. Conclusion: Fiscal Shock Watch 2025
Unless BSP’s easing gains real economic traction, the first four months of 2025 point to a growing likelihood of a fiscal shock.
- Revenue collection has deteriorated.
- Economic indicators signal fragility.
- Consumers are heavily indebted and weakening.
- External pressures—Trump's tariffs, deglobalization, and the re-emergence of "bond vigilantes" (investors who sell off government bonds when they believe fiscal policies are unsustainable, thus driving up borrowing costs for the government) could tighten external liquidity and worsen domestic financial conditions.
Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026.
If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate.
___
References
Prudent Investor Newsletter, Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm, May 18, 2025
Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, May 4, 2025