Winter is coming. Are we ready?
Economic history rarely moves in a straight line. Periods of prosperity are often followed by stretches of adjustment, when excesses accumulated during years of growth must eventually be corrected.
Investors experience this rhythm repeatedly. Optimism builds, credit expands and asset prices rise.
Eventually, the system reaches a point where balance sheets need repair, sometimes gradually, sometimes abruptly.
One framework that attempts to explain this rhythm is the Kondratieff wave, a theory developed by Russian economist Nikolai Kondratieff nearly a century ago. After studying long-term data on prices, wages, and interest rates, Kondratieff concluded that capitalist economies move through multi-decade cycles of expansion and contraction lasting roughly 50 to 60 years.
These long cycles are commonly described in four phases: spring, summer, autumn and winter.
Spring represents the early stage of expansion when innovation and new technologies ignite economic growth.
Autumn is often characterized by stable growth accompanied by rapid credit expansion and rising asset prices.
Finally comes winter. This is the phase when debts accumulated during earlier stages must gradually be unwound. In many ways, winter serves as the cleansing period of the economy.
Two years ago, we explored this theory in this column titled “Can we weather the economic winter?” and raised the possibility that the Philippine economy might be entering this stage of the long cycle. Since then, economic conditions have evolved in ways that make the question even more relevant today.
If we look at the debt levels of publicly listed companies in the Philippines, the ratio of corporate debt to market capitalization has risen significantly over time.
During the 2007 global financial crisis, the combined debt of listed firms represented only about 12 percent of their market value. By 2017, this ratio had climbed to roughly 34.7 percent. Just before the pandemic in 2019, it increased further to around 50.2 percent.
Today, the ratio still stands at about 51.1 percent.
By itself, this figure does not prove that the economy has reached a critical point. But persistent elevated leverage suggests that the balance-sheet cleansing associated with the winter phase has not yet fully taken place. In other words, the economy may still be approaching the cleansing phase of the cycle.
Periods of economic cleansing rarely unfold in isolation. They are often triggered by external shocks that expose underlying vulnerabilities.
Today, the global economy faces several potential sources of disruption. Geopolitical tensions remain elevated, particularly in the Middle East. The escalation of conflict has already pushed energy prices higher and increased the risk of renewed global inflation.
Currency volatility is another concern. A sustained break of the peso beyond P60 to the US dollar could add pressure on import costs and inflation expectations, particularly for an economy that depends heavily on imported fuel and commodities.
These factors do not automatically produce crises. But when leverage is already elevated, external shocks can act as catalysts that force financial adjustments.
A sustained rise in energy prices, for example, can push inflation higher and keep interest rates elevated. Higher borrowing costs then place pressure on companies with large debt obligations. Firms that once relied on easy refinancing may find credit conditions tightening.
At the same time, geopolitical tensions can affect economic activity. The Philippines has many overseas Filipino workers in the Middle East, and any disruption in the region could affect remittances and employment opportunities.
Slower global trade and weaker regional growth could also reduce demand for exports and services. When both borrowing costs rise and economic activity slows, corporate earnings can weaken.
Under such conditions, companies often respond by reducing investments, selling assets, or restructuring their balance sheets. In more severe cases, weaker firms exit the market altogether. This process is often how the cleansing phase of the cycle unfolds.
Whether such a sequence of events will unfold in the near term remains uncertain. The real question is not whether the cleansing phase will occur, but when.
History shows that the winter phase often begins with a period of financial stress that can last up to three years. This initial downturn forces the first wave of deleveraging as weaker firms exit and corporate balance sheets adjust.
The economy then enters a longer period of slower growth that can last for more than a decade before conditions for the next expansion emerge.
But according to Kondratieff’s long-wave theory, the seeds of the next expansion often begin to form even during this slower phase. Advances in areas such as artificial intelligence and renewable energy could raise productivity and stimulate new investment.
If these innovations spread widely, they could shorten the period of slower growth and help economies move sooner toward the summer phase.
If the cleansing phase of the long cycle has yet to unfold, the years ahead may still bring periods of volatility and adjustment. Investors who remain disciplined and focus on financially strong businesses may be better positioned to endure the winter stage of the cycle.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this May 2026. To register, e-mail at info@rfp.ph
