Economic expansions typically thrive on a symbiotic relationship between credit growth and investment. As banks extend loans and businesses borrow to fund new projects, productive capacity expands, construction activity surges, and the economy gains momentum. However, a concerning pattern emerges when credit continues to climb while investment activity begins to stall, raising questions about how borrowed funds are actually being utilized.
Economist Hyman Minsky's Financial Instability Hypothesis offers a compelling explanation for this divergence. According to Minsky, during the early stages of an economic cycle, borrowing primarily finances productive investments like factory construction and operational expansion. As the cycle matures, however, credit increasingly shifts toward less productive uses—such as refinancing existing debts or funding consumption rather than new capital projects. This transition often occurs subtly, without immediate warning signs, until the economy's borrowing structure becomes dangerously detached from productive activity.
Research from the Bank for International Settlements, led by economist Claudio Borio, corroborates this observation. Studies show that in many nations, lending continues to expand during the later phases of credit cycles even as investment growth decelerates. When this happens, economic growth may become increasingly reliant on debt-financed spending rather than productivity-enhancing capital formation. The true warning signal, therefore, isn't rapid credit growth alone—it's credit growth that persists even when investment fails to keep pace.
Examining Philippine economic data reveals this dynamic may be taking shape. From 2014 to 2019, a period of strong investment-driven growth, bank production loans nearly doubled from ₱4.05 trillion to ₱8.08 trillion. This credit expansion translated directly into economic activity: gross capital formation increased by 86% from ₱2.76 trillion to ₱5.15 trillion, while construction output rose 96% from ₱1.68 trillion to ₱3.29 trillion.
The pandemic disrupted this pattern between 2019 and 2021, with production loans growing only modestly by 5% to ₱8.52 trillion while investment contracted sharply. Gross capital formation fell 20% to ₱4.10 trillion, and construction output declined 18% to ₱2.68 trillion.
Post-pandemic reopening brought a rebound, with production loans rising 18.7% to ₱10.12 trillion in 2023 while gross capital formation increased 38.8% to ₱5.69 trillion and construction output grew 36.2%. However, the critical question remains whether credit growth will continue to fuel productive investment or increasingly shift toward less economically beneficial uses as the expansion matures.