The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts

  

Besides, stock prices are primarily information... they tell investors where their capital can be most fruitfully employed. The important thing is not that prices be high or low... but that they be honest—Bill Bonner 

In this issue

The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts

I. Monetary Tailwinds and a Fiscal Inflection

II. PSEi 30: Debt as the Primary Growth Driver

III. Record Revenues, Yet Slowing Growth Momentum

IV. Net Income Challenges: Slow Growth and Declining Margins

V. “Cui Bono?” — Who Benefits from GDP Growth? A Symptom of Trickle-Down Economics

VI. Sectoral Performance: Debt, Revenue, and Income Trends

VII Top Movers: Individual Firm Highlights

VIII. Final Notes on Transparency and Accuracy 

The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts 

What the PSEi 30 tells us about the Philippine economy’s fiscal and financial direction in 2024. 

I. Monetary Tailwinds and a Fiscal Inflection 

The Bangko Sentral ng Pilipinas (BSP) initiated the first phase of its easing cycle in the second half of 2024, comprising three policy rate cuts alongside a reduction in the Reserve Requirement Ratio (RRR). 

This coincided with an all-time high in public spending, bolstered by a surge in non-tax revenues. As a result, the Philippine fiscal deficit marginally narrowed to Php 1.506 trillion in 2024—still the fourth largest in history. To fund this gap, public debt rose to a historic high of Php 16.05 trillion. 

Simultaneously, a steep decline in quarterly Consumer Price Index (CPI) readings during Q3 and Q4 pulled average annual inflation down from 6.0% in 2023 to 3.2% in 2024. 

These three macroeconomic developments—monetary easing, record government expenditure, and easing inflation—served as key underpinnings of GDP growth. Despite noticeable slowdowns in Q3 (5.2%) and Q4 (5.3%), relatively stronger performances in Q1 (5.9%) and Q2 (6.5%) lifted full-year GDP growth to 5.7%, edging up from 5.5% in 2023.

Against this backdrop, how did the elite composite members of the PSEi 30 perform in 2024?

This article examines their financial performance, focusing on debt, revenue, net income, and sectoral contributions, while highlighting the broader implications for the Philippine economy. 

Nota Bene:

PSEi 30 data include redundancies due to the inclusion of assets and liabilities of subsidiaries and their parent holding firms.

Chart Labels:

B 1A Recent Data: Consists of current members and includes possible data revisions from the past year.

1B Data: Reflects comparisons between previous years, consisting of members during the existing period and unaudited publications for the period.

II. PSEi 30: Debt as the Primary Growth Driver

Figure 1 

In 2024, non-financial debt surged by 8.44% to a record Php 5.767 trillion, marking the third largest annual increase since 2018. (Figure 1, topmost pane) 

This Php 449 billion net addition occurred despite elevated borrowing costs, with 10-year BVAL rates remaining high. (Figure 1, middle graph) 

Relative to the broader financial system, non-financial debt accounted for 16.92% of total financial resources (bank and financial assets), slightly above the 16.87% share in 2023. (Figure 1, lowest image) 

On top of this, the top three PSEi 30 banks reported a staggering 49.99% increase in bills payable—from Php 483.58 billion in 2023 to Php 725.30 billion in 2024. Notably, this figure excludes bond issuances. 

III. Record Revenues, Yet Slowing Growth Momentum

Figure 2

The PSEi 30 collectively posted record revenues of Php 7.22 trillion, representing a 7.91% increase or Php 529.07 billion in absolute terms. This slightly surpassed the 7.8% growth or Php 478 billion gain in 2023. (Figure 2, upper chart) 

However, in historical context, the 2024 increase ranked as the third smallest since 2018—reflecting the easing of price pressures as the CPI cooled. 

Systemic leverage—defined here as the sum of public debt and universal/commercial bank loans (excluding fixed-income instruments and FDIs)—rose by 11.1% in 2024, reaching an all-time high of Php 29.96 trillion. (Figure 2, lower chart) 

This expansion in credit, alongside continued deficit spending, substantially supported aggregate demand, thereby contributing to the PSEi 30’s revenue gains. 

Figure 3 

However, viewed from another lens, the slowing contribution of money supply relative to GDP—a key indicator of real economy liquidity—has increasingly revealed slack in both PSEi 30 performance and broader GDP growth. (Figure 3, upper image) 

The 2020 spike in this metric underscored the BSP’s historic role in backstopping the banking system during the pandemic. 

Yet it also marked a turning point in the financialization of the Philippine economy—an underlying force behind demand-side inflation and a structural driver of imbalances between financial sector gains and real-sector productivity. 

Importantly, the deceleration in revenue growth mirrored the nominal GDP trends of 2023 and 2024, highlighting the interconnectedness of corporate performance and macroeconomic trends. (Figure 3, lower visual) 

IV. Net Income Challenges: Slow Growth and Declining Margins

Figure 4

Net income across PSEi 30 firms grew at a sluggish 6.8% to a record Php 971 billion. While this represents a nominal gain of Php 80.31 billion, both the growth rate and the absolute increase were the smallest since 2021. (Figure 4, topmost image) 

Despite widespread corporate participation in government projects, historic public spending growth of 11.04% outpaced net income growth, underscoring the accumulating inefficiencies in the effectiveness of 'trickle-down' policies. (Figure 4, middle graph) 

The PSEi 30 maintained a steady net income margin of 13.44%, slightly lower than last year's 13.45% but still exceeding the 5-year average of 12.15% (2019–2024). (Figure 4, lowest chart) 

Critically, the debt-to-net income ratio revealed that Php 0.46 in debt was needed to generate every Php 1 in profit. 

More alarmingly, on a net basis, Php 7.3 in new debt was required for every Php 1 increase in profit—a record high. 

The takeaway: Deepening debt dependency to drive profits is not only artificial but also subject to diminishing returns. 

V. “Cui Bono?” — Who Benefits from GDP Growth? A Symptom of Trickle-Down Economics

Figure 5

Revenue as a share of GDP edged up to 27.3% in 2024 from 27.22% in 2023—marking the third-highest level since 2019. (Figure 5 upper window) 

The PSEi 30 accounted for more than a quarter of nominal GDP, excluding additional contributions from other publicly listed firms under elite conglomerate umbrellas. 

This substantial contribution highlights a hallmark of the government and BSP’s “trickle-down” economic development model, characterized by increased business operations through direct state spending, which disproportionately benefits politically connected corporate giants. 

Importantly, the BSP’s easy-money regime functions as an implicit subsidy, enabling elite firms to acquire cheaper credit as a protective moat against competition. 

The result: a centralization of economic gains among the elite, while MSMEs and average Filipinos—Pedro and Maria—bear the costs. 

In essence, the model privatizes profits while socializing costs, exacerbating economic inequality. 

VI. Sectoral Performance: Debt, Revenue, and Income Trends 

In 2024, sectoral performance varied significantly: (Figure 5, lower table) 

Debt: The industrial sector posted the largest percentage increase in debt at 17.33% year-on-year (YoY), but holding firms dominated in peso terms, accounting for a 67.85% share of total debt. 

Revenues: Despite rising vacancies, the property sector recorded the highest percentage revenue gain at 16.6% YoY. However, holding firms led in absolute peso increases and percentage share, contributing 45.9% of total revenue growth. 

Net Income: The services and property sectors outperformed with net income growth of 20.6% and 17.6%, respectively. Banks, however, led in peso growth and accounted for 45.6% of the net income increase. 

Cash Holdings: Non-financial firms’ cash holdings contracted by 1.91%, driven by a 14.6% and 3.35% decline in reserves in the industrial and service sectors, respectively. 

In contrast, PSEi 30 banks saw their cash holdings rise by 14.6%, despite the BSP reporting otherwise. This discrepancy raises questions over possible dual standards in bank reporting. 

VII Top Movers: Individual Firm Highlights

Figure/Table 6 

Debt: San Miguel Corporation (SMC) led all firms with a Php 155 billion increase in debt, bringing its total to a historic Php 1.560 TRILLION—comprising 35% of all non-financial PSEi 30 debt. Ayala Corporation and its energy subsidiary ACEN followed with Php 76.9 billion and Php 54 billion increases, respectively.

Revenues: San Miguel, BPI, and BDO were the top contributors in terms of revenue increases. Conversely, DMC and its subsidiary Semirara reported revenue contractions. 

Net Income: ICT, BPI, and BDO led net income growth in absolute terms, while SMC and SCC posted the largest declines. 

Cash Holdings: The largest cash increases came from SMC and ICT, while Aboitiz Equity Ventures and LTG Group reported the steepest reductions. 

VIII. Final Notes on Transparency and Accuracy 

The credibility of this analysis rests on disclosures from the Philippine Stock Exchange and related official sources. However, questions persist regarding the possible underreporting of debt and the inflation of both top-line and bottom-line figures by certain firms. 

Moreover, when authorities overlook or fail to act on instances of misreporting—especially by large, elite-aligned corporations—this raises serious governance concerns. Such inaction fosters moral hazard and risks entrenching a culture of non-transparency within the corporate sector. 

Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm

  

Truth always originates in a minority of one, and every custom begins as a broken precedent—Nancy Astor 

In this issue: 

Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm

I. Introduction: A Financial-Political Economic System Under Increasing Strain

II. Liquidity Infusion via RRR Cuts: A Paradox: Declining Cash Amid Lending Boom

III. Mounting Liquidity Mismatches: Slowing Deposits Amid Lending Surge, Liquidity Ratios Flashing Red

IV. Government Banks and Broader Financial Systemic Stress

V. Mounting Liquidity Mismatches: Record Surge in Bank Borrowings and Repo Market Heats Up

VI. RRR Cuts as a Lifeline, Not Stimulus, Why the Strain? Not NPLs, Not Profitability

VII. Bank-Financial Index Bubble and Benchmark-ism: Disconnect Between Profit and Market Valuation

VIII. Financial Assets Rise, But So Do Risks; Spotlight on Held-to-Maturity Assets (HTM); Systemic Risks Amplified by Sovereign Exposure

IX. Brace for the Coming Fiscal Storm

X. Non-Tax Revenues: A High Base Hangover; Rising Risk of a Consecutive Deficit Blowout

XI. April 2025 Data as a Critical Clue of Fiscal Health

XII. Aside from Deficit Spending, Escalating Risk Pressures from Trade Disruptions and Domestic Economic Slack

XIII. Final Thought: Deepening Fiscal-Bank Interdependence Expands Contagion Risk Channels 

Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm 

Behind the balance sheets: why Philippine banks are bleeding cash even as lending accelerates—and what the looming fiscal blowout means for systemic risk. 

I. Introduction: A Financial-Political Economic System Under Increasing Strain

We begin our analysis of the Philippine banking system in Q1 2025 with our April assessment:

"However, the data suggests a different story: increasing leverage in the public sector, elite firms, and the banking system appears to be the real driver behind the BSP’s easing cycle, which also includes RRR reductions and the PDIC’s doubling of deposit insurance. 

"The evidence points to a banking system under strain—record-low cash reserves, a lending boom that fails to translate into deposits, and economic paradoxes like stalling GDP growth despite near-record employment." (Prudent Investor, April 2025) [bold italics original] 

The Bangko Sentral ng Pilipinas (BSP) released pivotal data in its April 2025 Central Bank Survey (MAS) and an updated balance sheet and income statement for the Philippine banking system. 

The findings reveal a sector grappling with severe liquidity constraints despite aggressive monetary easing. 

This article dissects these challenges, exploring their causes, implications, and risks to financial stability, while situating them within the broader economic and fiscal landscape. 

II. Liquidity Infusion via RRR Cuts: A Paradox: Declining Cash Amid Lending Boom 

Figure 1

The second leg of the BSP’s Reserve Requirement Ratio (RRR) reduction in March 2025 resulted in a Php 50.9 billion decrease in liabilities to Other Depository Corporations (ODCs) by April. 

When combined with the first RRR cut last October, the cumulative reduction from October to April amounted to a staggering Php 429.4 billion—effectively unleashing nearly half a trillion pesos of liquidity into the banking system via freed-up cash reserves. (Figure 1, topmost window) 

Even more striking was the BSP’s March report on the balance sheets of Philippine banks. The industry's "cash and due from banks" dived 28.95% year-on-year, from Php 2.492 trillion in 2024 to Php 2.09 trillion in 2025—its lowest level since at least 2014! (Figure 1, middle graph) 

This sharp drop calls into question the effectiveness of RRR cuts while also exposing deeper structural issues within the banking system. 

Ironically, this cash drain occurred alongside a robust expansion in bank lending. Yet, deposit growth stalled, which further strained liquidity and weighed on money supply growth. 

The limited impact of RRR reductions may reflect banks using freed-up reserves to cover existing liquidity shortfalls rather than fueling new lending or deposit growth. 

Meanwhile, the BSP’s move to double deposit insurance through the Philippine Deposit Insurance Corporation (PDIC) last March—nearly coinciding with the second phase of the RRR cut—signals growing concerns over depositor confidence, potentially foreshadowing broader financial stability risks 

III. Mounting Liquidity Mismatches: Slowing Deposits Amid Lending Surge, Liquidity Ratios Flashing Red 

The decline in cash reserves coincided with decelerating deposit growth, even as bank lending surged. 

Deposit liabilities growth fell to just 5.42% in March—its lowest since August 2019. The deceleration was mainly driven by a slowdown in peso deposits growth, from 6.28% in February to 5.9% in March. Foreign currency (FX) deposits also remained a drag, despite a modest improvement from 2.84% to 3.23%. (Figure 1, lowest diagram) 

In stark contrast, the banking sector’s total net lending portfolio (inclusive of RRPs and IBLs) surged to 14.5% in March from 12.31% in February.

Figure 2 

As a result, the ratio of "cash and due from banks" to total deposits has collapsed to 10.37% in March 2025, levels below those seen in 2013—underscoring an escalating liquidity mismatch! (Figure 2, upper pane) 

This divergence highlights a critical tension: despite BSP’s aggressive monetary easing, lending is not translating into deposit growth. Instead, it has created a liquidity conundrum—intensifying balance sheet strain. 

Beyond cash, the liquid assets-to-deposits ratio has fallen back to levels last seen in April 2020, effectively reversing the gains achieved during the BSP’s pandemic-era historic liquidity rescue. 

This indicates a depletion of liquid assets—comprising cash and net financial assets excluding equities—which are crucial for meeting withdrawal demands and regulatory requirements, making this decline a critical vulnerability. 

Curiously, cash positions reported by publicly listed banks on the PSE showed a 4.43% YoY increase, with only five of the 16 banks reporting a cash decline. This apparent contradiction prompted deeper scrutiny. (Figure 2, lower table) 

The divergence between lending and deposit growth indicates a breakdown in the money multiplier effect, where loans typically generate deposits as borrowers spend. 

Two critical factors likely driving the erosion of savings. 

First, steep competition arising from the financing crowding-out effect of government borrowing (via record deficit spending), which competes with banks and the non-financial sector for access to public savings, has been a key force in suppressing savings. 

Second, extensive debt accumulation from malinvestments in 'build-and-they-will-come' sectors further consumes savings and capital, exacerbating the decline. 

IV. Government Banks and Broader Financial Systemic Stress 

Our initial suspicion pointed to government banks (DBP and LBP) as potential sources of the cash shortfall.

Figure 3

However, BSP data revealed that liquidity pressures were widespread—not only affecting universal and commercial banks but also impacting thrift and rural-cooperative banks.  (Figure 3) 

Interestingly, these smaller banking institutions (rural-cooperative banks) displayed relatively better liquidity positions than their larger peers. 

This discrepancy could reflect differing reporting standards between disclosures to the public and to the BSP. 

Diverging indicators could also signal "benchmark-ism"—where worsening problems are obscured through embellished reporting. 

V. Mounting Liquidity Mismatches: Record Surge in Bank Borrowings and Repo Market Heats Up 

Another red flag is the record-high bank borrowing.

Figure 4

Total bank borrowings soared by 40.3% in March to an all-time high of Php 1.91 trillion. This pushed the borrowing-to-liabilities share to 7.89%—its highest level since the pandemic’s onset in March 2020. (Figure 4, topmost chart) 

The sharp rise was driven by bills payable, which skyrocketed by 65.4% in March. 

In contrast, bonds payable grew by just 4.12%. As a result, bills payable now make up 5.5% of total liabilities—almost double the 2.9% share of longer-term bonds. (Figure 4, middle image)

This asymmetry is mirrored in listed banks’ financials. Excluding BPI (which lumps bills under "other borrowed funds"), bills payable surged by 69.4% in Q1 2025 to Php 1.345 trillion. 

MBT alone reported a 214% increase to Php 608 billion—representing 45.21% of the aggregate from PSE-listed banks. 

Repo transactions also surged in March. (Figure 4, lowest diagram) 

Interbank repos hit an all-time high, while repo trades with the BSP reached the third highest level on record. This reflects increasing reliance on short-term funding mechanisms, a hallmark of tightening liquidity conditions. 

This reliance on short-term borrowing for bridge financing, while cost-effective in the near term, exposes banks to refinancing risks, particularly if interbank rates rise or market confidence falters. 

All this underscores that liquidity stress is not confined to a single quarter—it is deeply embedded in bank balance sheets. 

VI. RRR Cuts as a Lifeline, Not Stimulus, Why the Strain? Not NPLs, Not Profitability 

In hindsight, both legs or phases of the RRR cut were not preemptive monetary tools but reactive measures aimed at alleviating a growing liquidity crisis. 

Similarly, rate cuts—intended to reduce borrowing costs—only served to expose the structural weaknesses in the banking system.

Figure 5

According to the BSP, credit delinquency improved in March, with Gross and Net Non-Performing Loans (NPLs) as well as Distressed Assets showing a slight decline. (Figure 5, topmost pane) 

Indeed, the banking system posted a 10.6% YoY increase in Q1 2025 profits—better than last year’s 2.95%, but still significantly weaker than 2022–2023. It was also a deceleration from Q4’s 20.7%. 

While the profit rebound is positive, it may be artificially inflated by 'accounting acrobatics.' The slowdown relative to 2022–2023 suggests diminishing returns from lending—driven by weaker borrower demand, rising unpublished NPLs, or both.’

VII. Bank-Financial Index Bubble and Benchmark-ism: Disconnect Between Profit and Market Valuation 

Despite slowing profit growth, the PSE’s Bank dominated Financial Index continued to hit record highs in Q1 and into May 2025. This signals a disconnect between bank valuations and their actual financial or ‘fundamental’ performance. (Figure 5, middle graph) 

This growing divergence may reflect "benchmark-ism"—where inflated share prices are used to mask the sector’s internal fragilities, as previously discussed. 

Despite a sharp slowdown in revenue growth (10.37% vs. 24% in 2024), listed banks still posted a 7.5% increase in ‘accounting profits.”  (Figure 5, lowest diagram) 

In theory, profits should enhance liquidity, not diminish it—unless those profits are largely cosmetic—"benchmark-ism." 

For investors, the divergence between stock performance and fundamentals signals caution, as inflated valuations could unravel if liquidity pressures escalate. 

VIII. Financial Assets Rise, But So Do Risks; Spotlight on Held-to-Maturity Assets (HTM); Systemic Risks Amplified by Sovereign Exposure 

The rapid contraction in cash reserves cannot be fully attributed to lending, NPLs, or financial asset growth.

Figure 6

Bank financial assets (net) rose 11.8% to an all-time high of Php 7.89 trillion in March. Accumulated unrealized losses narrowed from Php 26.4 billion to Php 21.04 billion. (Figure 6, topmost chart) 

Instead, held-to-maturity (HTM) assets, primarily government securities, offer insight. 

After a period of stagnation, HTMs grew 1.7% in March—breaking the Php 4 trillion ceiling (since 2023) to reach a new high of Php 4.06 trillion. (Figure 6, middle image) 

Despite lower interest rates, banks have not pared back HTM holdings. That’s because most HTMs are composed of government securities, particularly "net claims on the central government" (NCoCG), which surged to a record Php 5.58 trillion in March. (Figure 6, lowest diagram) 

This spike aligns with the record Q1 fiscal deficit—and likely presages a similarly wide Q2 deficit.

IX. Brace for the Coming Fiscal Storm 

As we’ve consistently argued, rising sovereign risk will amplify the banking system’s fragility. 

A blowout fiscal deficit won’t just expose skeletons—such as questionable accounting practices used to inflate profits, understate NPLs, or distort share prices—it will likely push the BSP toward a more aggressive role in stabilizing the financial system. 

This intervention could have sweeping implications for financial markets and the broader economy.

Figure 7

The public and the market's complacency over the government's deteriorating fiscal position has been astonishing. 

In Q1 2025, a steep revenue decline triggered a record fiscal deficit blowout—comparable to historical first-quarter data. As a result, the deficit-to-GDP ratio surged to 7.3%, far above the government’s full-year target of 5.3% (DBCC). (Figure 7, topmost window) 

Markets have largely dismissed these data, buoyed by two ‘available bias’ heuristics: the midterm election cycle and a steady stream of official reassurances. 

Yet it is worth underscoring: the 7.3% deficit-to-GDP ratio masks the extent of dependence on deficit spending. That same deficit spending was a key driver behind Q1 2025’s 5.4% GDP growth—just as it has been in many previous quarters/years. 

Also, it is crucial to distinguish the nature of government spending and revenue: while expenditures are programmed or mandated by Congress, actual disbursements are increasingly prone to executive discretion, with breaches of the enacted budget observed over the past six straight years—symptoms of centralization of power. 

In contrast, revenues depend on both economic activity and administrative collection efforts. 

Despite a 13.6% year-on-year increase in tax revenues in Q1, this gain failed to offset the collapse in non-tax revenues, which plunged by 41.2%. This drop severely weakened the overall revenue base. 

X. Non-Tax Revenues: A High Base Hangover; Rising Risk of a Consecutive Deficit Blowout

Non-tax revenues surged by 57% in 2024, lifting their share of total collections to 13.99%—the highest since 2007’s 17.9%.  (Figure 7, second to the highest chart) 

With a long-term average of 11.7% since 2000, current levels are markedly elevated. Moreover, 2024 figures significantly exceeded the exponential trend, indicating the potential for a substantial retracement. 

While the official breakdown or targets for collection categories remain undisclosed, it is plausible that non-tax revenue targets for 2025 were benchmarked against last year’s elevated base—potentially complicating fiscal planning and exacerbating volatility in public revenue performance 

Authorities expect total revenues to reach 16.5% of GDP in 2025. Yet, in Q1, the revenue-to-GDP ratio slipped to 15.15%, reflecting the substantial shortfall in non-tax collections. 

This implies that the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC)—which posted 16.7% and 5.7% year-on-year growth respectively in Q1—would need to significantly accelerate collections to bridge the gap. 

But the Q1 data suggests that current tax growth trends are unlikely to be sufficient. 

If tax revenue growth merely holds steady—or worse, underperform—then Q1’s historic deficit may not be a one-off.  

Instead, it risks being carried into Q2, leading to a second consecutive quarter of elevated deficits.  

This would reinforce perceptions of fiscal slippage or ‘entropy’, with direct implications for financial markets, interest rates, and banking sector dynamics.  

XI. April 2025 Data as a Critical Clue of Fiscal Health  

The Bureau of the Treasury is expected to release the April 2025 National Government Cash Operations Report (COR) in the final week of May.  

Due to the shift in VAT filing from monthly to quarterly, April’s figures will be the first major test of whether tax receipts can rebound sharply enough to counterbalance the Q1 shortfall.  

April is typically one of the stronger months for collections. For instance, in January 2024, the government recorded a Php 87.95 billion surplus—the highest since 2023—following changes in the VAT reporting regime. (Figure 7, second to the lowest graph) 

To keep the 2025 full-year deficit ceiling of Php 1.54 trillion within reach, the government would need to secure multiple monthly surpluses—or at least significantly smaller deficits. 

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.  

XII. Aside from Deficit Spending, Escalating Risk Pressures from Trade Disruptions and Domestic Economic Slack  

However, this fiscal balancing act is made more difficult by worsening external and domestic conditions.  

The global trade slowdown—exacerbated by ongoing trade tensions and supply chain fragmentation—will likely weigh on the Philippines’ external trade. 

Meanwhile, intensifying signs of slack in the domestic economy further threaten revenue generation, especially for the BIR and BOC. 

These pressures highlight the structural reliance on debt-financed deficit spending. 

Rising fiscal shortfalls increase sovereign risk, which can ultimately be transmitted into the broader economy through multiple channels—elevated inflation or stagflation risks, weakening credit quality or credit risks, liquidity pressures in the banking system and more. 

Contagion risks may also emerge in financial markets, manifesting through a surge in the USD/Php exchange rate (currency risk), rising bond yields (currently diverging from declining ASEAN counterparts) or interest rate risk, and amplified volatility in the stock market (including related markets—market risk). (Figure 7, lowest image) 

All these factors align with—and reinforce—the deteriorating liquidity and funding conditions apparent in bank balance sheets.

The nexus between fiscal fragility and banking stress is no longer theoretical; their growing interdependence is symptomatic in slowing deposit growth, increased reliance on repo markets, and rising bank borrowing. 

XIII. Final Thought: Deepening Fiscal-Bank Interdependence Expands Contagion Risk Channels 

As fiscal risks mount, so too does the potential for cross-sectoral contagion and cascading effects. The banking system—already struggling with liquidity depletion—faces heightened exposure due to its expanding claims on sovereign securities (implicit quantitative easing). 

Again, though partially obscured, stagflationary pressures, deteriorating credit quality, and rising funding costs may converge, amplifying broader macro-financial instability. 

In short, the fiscal storm is no longer a distant threat—it is approaching fast, and its first casualties may already be visible in the cracks forming across the financial system. 

______   

Reference 

Prudent Investor, BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?, April 13,2025, Substack

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

 

The vulgar Keynesian focus on consumption unfortunately tempts politicians to approve “stimulus” measures aimed at pumping up this part of total spending…Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption—Robert Higgs 

In this issue

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations

II. The Big Consensus Miss Versus a Contrarian View of the GDP

III. On GDP: Methodological Skepticism and Political Incentives

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble!

V. Slowing Liquidity and Money Supply Trends

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On?

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle

XI. Salary Loans: A Proxy for Financial Distress?

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion 

A crucial Q1 2025 GDP forecast miss by the consensus, and why embracing mainstream ideas can be perilous for investors. 

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations 

Q1 2025 GDP should fully reflect the initial phase of the Bangko Sentral ng Pilipinas’ (BSP) easing cycle, launched in the second half of 2024 with three interest rate cuts and a reduction in the reserve requirement ratio (RRR). 

While this policy shift may be touted as stimulating credit growth and investment, its actual goal may be to inject liquidity into the system while simultaneously lowering debt servicing costs. 

The combined effects of the 2024 and 2025 easing phases are expected to influence the performance of Q2 and first-half 2025 GDP 

II. The Big Consensus Miss Versus a Contrarian View of the GDP

Figure 1

Two days before the Philippine Statistics Authority (PSA) released its Q1 2025 GDP estimates, consensus forecasts predicted a robust 5.9% growth rate. We challenged this optimism, arguing (in x.com) that it likely overestimated actual performance. (Figure 1, upper image) 

Three critical indicators provide essential clues to the economy’s trajectory: 

1. Bank Revenues Signal Weakening Demand 

First, the combined Q1 2025 gross revenues of two of the Philippines’ largest banks, BDO Unibank [PSE: BDO] and Metropolitan Bank & Trust [PSE:MBT], recorded a fourth consecutive quarterly decline since Q1 2024, with Q1 2025 marking the sharpest deceleration. 

Given that their revenues accounted for approximately 1.72% of 2024 nominal GDP (NGDP), this slowdown signals broader economic weakness. 

Despite aggressive lending, banks appear to be yielding diminishing returns. That said, while banks may be aggressively lending, they may not be "getting a bang for their buck," as an old saw goes. 

This trend underscores inefficiencies in credit allocation, potentially dampening economic activity. 

And yes, Financial GDP slowed in Q1 (Figure 1, lower window) 

2. Declining Headline CPI Reflects Softening Demand 

Headline CPI has now posted three consecutive quarters of decline. We interpret this not merely as a result of supply-side adjustments but primarily as a reflection of weakening aggregate demand—a point we have consistently emphasized. 

3. Fiscal Stimulus: Record Q1 Deficit-Financed Spending

Figure 2 

Third, public spending surged in Q1 2025, resulting in a record fiscal deficit for the period. This aggressive expenditure, designed to bolster GDP, was highlighted in last week’s analysis. (Figure 2, upper graph) 

However, this strategy carries risks, including crowding out private sector activity and exacerbating public debt. 

4. Trendlines and Economic Realities: The Shift to a Slower Growth Path 

Using the PSA’s peso-denominated figures, nominal GDP (NGDP) and real GDP (rGDP) reveal a secondary trendline that has guided economic performance since the pandemic recession. (Figure 2, lower visual) 

Seen from this perspective, this second trendline essentially extrapolates to a slowing GDP trajectory. 

With that said, unless the economy regains its primary growth path, this downward trend will persist, operating under the shadow of significant downside risks. 

We are both amused and amazed by the pervasive optimism—or mass delusion—among establishment analysts, who consistently, or rather perpetually, echo official predictions rather than scrutinizing actual data. 

This tendency, aimed at shaping the Overton Window—the range of ideas deemed acceptable in public discourse—reflects a patent disconnect from economic realities. 

III. On GDP: Methodological Skepticism and Political Incentives 

We are not staunch believers in GDP, which we believe is determined and calculated for political purposes. It relies on structural mismatches between the subjectivism of human actions and the objectivism of the empirical analysis underlying it. Consequently, its calculation is based on numerous flawed assumptions. 

In any case, although authorities can manipulate figures to promote their agenda (as neither the CPI nor GDP is subject to audit), economic reality will ultimately prevail 

Despite this, true enough, the Q1 2025 GDP growth rate of 5.4% fell significantly below consensus estimates, validating our cautious outlook. 

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble! 

The bank-finance sector’s real GDP growth slowed from 8.3% in Q1 2024 to 7.2% in Q1 2025. (Figure 1, upper chart, again) 

Despite this deceleration, its outperformance relative to other sectors boosted its GDP share to a record 11.7%, signaling the deepening "financialization" of the Philippine economy. 

Strikingly, despite this, bank GDP growth substantially slowed over the last five quarters, from Q1 2024 to Q1 2025 (13.1%, 10.2%, 8.7%, 6.5%, and 5%), affirming my analysis. 

The Raging Financial Stock Market Bubble

Figure 3 

Despite this, the PSE’s bank-dominated financial index continues to hit all-time highs (including this Friday or May 9)—more evidence of the disconnect between share prices and fundamentals or a growing sign of a stock market bubble. (Figure 3, topmost diagram) 

Instead of widespread public participation, its less apparent nature stems from rising share prices being driven mainly by the "national team" or the BSP's cartel- network of banks and financial institutions. 

Bear in mind, the free float market cap share of the top three banks has been instrumental in supporting and currently driving the PSEi 30 to its present levels. 

BDO, BPI, and MBT account for 24.2%—up from a low of 12.76% in August 2020—while including CBC, this rises to 25.9% of the PSEi 30 (as of May 9). These four listed banks rank among the top 10 by free float market cap. (Figure 3, middle chart)

The banks’ outperformance coincides with, or bluntly put, stems from, the BSP’s historic rescue efforts and massive subsidies during the pandemic, which have been carried over to this day.

The percentage share of turnover of the top five banks in the financial index has averaged 23% of the main board volume Year-to-date—indicating a heavy buildup of concentration activities or risk. 

In any case, while banks constitute 60% of the sector’s GDP, the outperformance of non-banks and insurance companies buoyed the sector’s GDP. 

V. Slowing Liquidity and Money Supply Trends 

Liquidity conditions eased further in Q1 2025, with the money supply-to-GDP ratio (M2 and M3) continuing its downward trajectory. (Figure 3, lowest image) 

This trend, which accelerated from 2013 to 2018 and spiked during the 2019–2020 pandemic recession with the BSP’s Php 2.3 trillion injection, has significantly influenced CPI through what the mainstream calls "aggregate demand." 

In the current phase of this cycle, since peaking in 2021, this key measure of credit-driven demand has slowed, contributing significantly to the recent CPI slowdown.

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition 

The third indicator reinforcing our analysis is public spending.

Figure 4

Q1 2025 expenditures surged by 22.43%, outpacing revenue growth and resulting in a record Q1 fiscal deficit of Php 478 billion. 

This nominal spending boom translated into a significant GDP contribution, with government spending GDP spiking by 18.7%—the highest since Q2 2020—excluding government construction spending! (Figure 4, topmost graph) 

However, consumer spending GDP, while rising from 4.7% in Q4 2024 to 5.3% in Q1 2025, saw its share of national GDP decline from 74.7% to 74.3%. (Figure 4, second to the highest window) 

In contrast, government GDP’s share rose from 12.3% to 15.9%, reflecting a structural shift. 

These numbers reflect an ongoing trend: they reveal the peak of consumer spending at 80.6% in Q3 2002, which steadily declined to the 2020 range (67–75%), while conversely, since its 8% low in Q4 2005, government GDP has nearly doubled, with its trend accelerating since 2020. 

All these are evidence that there is no such thing as a free lunch, as whatever the government takes from the private sector for its expenditures or consumption comes at the latter’s expense—the crowding-out syndrome in motion. 

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt 

This shift comes at a cost—record Q1 2025 public debt. Public debt soared from Php 16.05 trillion in Q4 2024 to a historic Php 16.68 trillion, a net increase of Php 633 billion, financing the period’s Php 478.8 billion fiscal deficit! 

This quarterly debt increase, the highest since Q3 2022, reflects an upward trend! (Figure 4, second to the lowest chart) 

Furthermore, a weaker US dollar in March tempered debt growth, reducing the foreign exchange (FX) debt share to 31.8%. However, the FX debt share has been rising since its March 2021 trough. (Figure 4, lowest graph) 

Consequently, Q1 2025’s deficit-to-GDP ratio surged to 7.27%, far exceeding the government’s 5.3% target! 

Looking at all this, both macro (CPI, deficit spending) and micro (bank revenues, bank GDP) factors have converged to highlight a significant economic slowdown, yet despite the establishment’s cheerleading, the diminishing returns of artificial growth driven by implicit backstops—BSP easing and fiscal stimulus—will gradually take their toll and heighten risks. 

As it stands, this marks another round for this contrarian analyst. 

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On? 

Let us now examine the other critical forces shaping the statistical economy—GDP.

Figure 5 

Not one among the establishment punditry seems to ask: While the Philippine economy nears full employment, instead of a boost, GDP has been declining—what the heck is going on? 

Employment reached 96.1% in March 2025, averaging 96.02% in Q1 2025 and 95.9% over the 25 months since January 2023, according to Philippine Statistics Authority (PSA) data. (Figure 5, topmost visual) 

However, this near-full employment masks structural weaknesses. 

Consumer per capita GDP, which peaked at 8.98% year-on-year in Q2 2021, has decelerated, with Q1 2025’s 4.4% growth—up slightly from 3.84% in Q4 2024—marking the second-slowest pace since the pandemic. 

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

While the workforce population continues to grow, the labor force participation rate has formed a "rounding top" pattern, indicating a gradual peak and a potential decline. In simpler terms, more people are being counted outside the labor force. (Figure 5, middle diagram) 

Why is this happening? 

A recent Congressional report on functional illiteracy in the education sector provides a critical clue. 

The Manila Times, May 7, 2025: "BETWEEN 2019 and 2024, 18 million students graduated from the country's basic education system despite being functionally illiterate. This was found by the Senate Committee on Basic Education during its April 30, 2025 hearing on the initial results of the 2024 Functional Literacy, Education, and Mass Media Survey (Flemms)." 

Assuming 16.2 million of these graduates remain in the labor force or are employed, while 10% (1.8 million) have joined the "not in the labor force" category (due to migration, mortality, or disengagement), approximately 32% of the labor force or 33% of the employed population is engaged in low-skilled work 

That’s right. Despite near full-employment data from the PSA, a large segment of the workforce is likely in low-skill, low-wage jobs, possibly concentrated in MSMEs or previously informal sectors, often earning at or below the minimum wage. 

This dovetails with Social Weather Stations (SWS) sentiment surveys, which continue to show elevated self-rated poverty (April 2025) and milestone hunger rates in Q1 2025.

In a nutshell, the most vulnerable population segments—those in low-wage, low-skilled jobs—are also the most exposed to inflation. 

These dynamics explain why poverty perceptions remain high despite supposedly strong employment numbers. 

The shrinking labor force could also be a symptom of “grade inflation,” producing a flood of graduates ill-equipped for skilled work. 

A closer look at PSA employment classifications reveals more. From January 2023 to March 2025, full-time employment averaged 67.3%, while part-time work averaged 31.9%. 

This implies a substantial portion of the workforce is underemployed or working in precarious conditions. The near-full employment figures may therefore overstate the true health of the labor market. 

In effect, the PSA’s employment data provides a façade—masking the fragility of both the labor market and broader economy. 

This explains the sluggish per capita consumption and, by extension, the national GDP. 

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle 

Following the BSP’s historic rescue of the banking system during the pandemic, money supply metrics—particularly M1—have closely tracked GDP trends. (Figure 5, lowest chart) 

GDP peaked in Q1 2021, following the M1-to-GDP spike from Q3 2019 to Q3 2023. This spike reflected the pre-pandemic bank credit expansion, intensified by the BSP’s Php 2.3 trillion liquidity injection and other pandemic-related rescue measures. 

Since then, both GDP and M1 have slowed in tandem, though M1 has decelerated at a faster rate. 

This matters, because M1—comprising cash in circulation and demand deposits—underpins the transactions that generate GDP. 

Despite the BSP’s initial easing cycle in 2H 2024, liquidity growth continues to decelerate, even as Universal-Commercial bank credit expansion reaches record highs in peso terms (Q1, 2025) 

The lack of liquidity response to the first easing cycle prompted the BSP to implement a second phase: a deeper RRR cut, the doubling of deposit insurance coverage, and a fourth policy rate cut in April. 

However, monetary policy can only do so much in the face of structural issues. 

XI. Salary Loans: A Proxy for Financial Distress?

Figure 6

Wage earners are increasingly relying on salary loans to bridge the gap to offset reduced purchasing power 

While total salary loans (in pesos) have reached all-time highs, the growth rate of these loans has been slowing since Q1 2022—(strikingly) mirroring the trend in headline CPI. (Figure 6, topmost chart) 

However, slowing growth raises questions: Has the banking system reached peak salary loans? 

Has the pool of eligible borrowers maxed out? Are employees hitting credit limits for salary loans? Or are rising non-performing loans (NPLs) forcing lenders to tighten? (Figure 6, middle graph) 

Either way, the data signals distress among middle-income and lower-income workers, who are increasingly stretched and vulnerable.         

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

Headline CPI fell to just 1.4% in April (for 2Q GDP)—driven mainly by sharp food price declines. 

Yet little is said about the regulatory basis for this fall. Both rice and pork prices are subject to quasi-price controls via Maximum Suggested Retail Prices (MSRPs). And even here, compliance—particularly for pork—has been reportedly low. (Figure 6, lowest image)

Figure 7

Core CPI stabilized at 2.2% in April 2025, outperforming headline CPI since the MRSP. This reinforces the headline CPI’s decline due to regulatory maneuvers. The core index’s downtrend since Q2 2023 signals persistent demand weakness. 

However, rising month-on-month (MoM) rates suggest a potential bottom. This pattern mirrors previous episodes (2015, 2019), where food prices fell below Core CPI, acting as a staging point for the next inflation cycle. (Figure 7, topmost and middle charts) 

Regulatory and statistical distortions raise doubts about whether CPI distortions accurately reflect real market conditions. 

Another revealing metric is the spread between the national CPI and the Bottom 30% CPI, where food deflation for the Bottom 30% in April drove the spread sharply negative—reaching its lowest level since 2022—yet, while these numbers suggest that falling food prices for the poor should reduce hunger, the latest SWS survey indicates persistently high hunger rates. (Figure 7, lowest graph) 

Once again, the statistical data points diverge from lived experience. 

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

The government’s CPI reveals numerous distortions, clearly being manipulated downward through regulation and statistical adjustments "benchmark-ism" to justify the BSP’s continued easing cycle, aimed at addressing debt and liquidity dynamics, as well as boosting GDP—which the establishment promotes as a stimulus. 

Yet behind the curated optimism—such as "upper-middle-income status"—lies a more disturbing truth: government statistics increasingly defy both economic logic and market signals. 

Market prices—USD Philippine peso exchange rate and Philippine Treasury yields—offer little support for these narratives. 

And yet, the Overton Window shaped by official optimism persists. 

Analysts, pundits, and policymakers alike remain obsessed with the hope it offers—ignoring hard realities staring them in the face. 

Until these contradictions are resolved, the statistical economy and the real economy will continue to drift further apart. 

Or, confronting these realities is essential to understanding the Philippine economy’s true trajectory.