Modern democracy and bureaucracy
progressively separate decision-makers from the costs and feedback generated by
their decisions. Democracy separates voters from decisive responsibility,
bureaucracy separates administrators from profit and loss, inflation separates
spending from visible taxation, transferism separates consumption from
production, and media and intellectuals separate narratives from empirical
accountability. All this tends toward and encourages living in unreality which
might be called mental moral hazard—Joshua Mawhorter
In this issue:
Stagflation Part 16: The Peso's 24th Record Low — When
the Pressure Valve Widens
I. The Peso is Not Falling, It is Clearing
II. The Peso’s Travails Didn't Start Last Week
III. It Isn't the Dollar: The Peso Is Losing Ground to
Frontier-Market Currencies
IV. The Peso’s Gold Test
V. The Soft Peg BSP Denies
VI. What the GIR Data Actually Shows
VII. The Central Argument: This Is a Savings-Investment
Gap, Not an Oil Shock
VIII. Eight Barometers of the Savings-Investment Gap
IX. The Strawman Defense
X. Conclusion: The Pressure Valve, Again
Stagflation Part 16: The Peso's 24th Record Low — When
the Pressure Valve Widens
Even against Cambodia and Laos, the Philippine peso
keeps falling—revealing an internal imbalance that dollar strength cannot
explain
I. The Peso is Not Falling, It is Clearing
The USDPHP closed Friday at a record 62.68, its 24th
record low of 2026, 21 of them since the Middle East war began. The pair was up
a modest 0.14% week-on-week, pushing YTD depreciation to 6.62%.
A single record is noise. Twenty-four in one year,
overwhelmingly clustered inside a nine-month war window, is a pattern requiring
a causal explanation.
The question is not “why did the dollar rise Friday?”
That question is designed to be unanswerable in a way that absolves policy. The
question is why the peso, of all regional currencies facing the same war, the
same oil shock, the same Fed, keeps landing at the bottom of the pile.
II. The Peso’s Travails Didn't Start Last Week
The 2:1 USDPHP peg was not a natural state of affairs. It
was written into law by the 1946 Bell Trade Act, a
condition the United States attached to $800 million in postwar rebuilding
assistance.
It survived, more or less intact, for over a decade,
until the arithmetic of an overvalued peso—visible in a thriving dollar black
market and chronic current-account strain—forced a retreat.
Formal decontrol began in April 1960, when the Central
Bank introduced a multi-tier exchange system under Circular
105. The official Php 2 rate held for some transactions while a
Central-Bank-managed “free-market” rate, initially Php 3.20, applied to others.
Further adjustments followed through 1961.
In January
1962, President Diosdado Macapagal substantially lifted the remaining
controls, and the peso lost roughly half its value, settling near Php 3.90.
The formal unification came almost four years later. Executive Order No. 195, signed
November 6, 1965, fixed the new par value at $0.2564103 per peso—approximately Php
3.90/$1.
From that Php 2 starting parity to Friday's Php 62.68,
the peso has lost more than 97% of its dollar value over six decades.
That is the scale against which any single week's move
should be read.
Since that 1962-65 transition, and treating the currency
the way Nassim Taleb's
Lindy Effect heuristic treats any long-surviving process—its continuation
is the base case, not the exception—the USDPHP has been in a secular bull market.
The pattern of countercyclical peso rallies recur:
- January 1984–February 1985, after the 1983 debt crisis;
- December 1990–August 1992;
- September 1998–June 1999, after the Asian crisis;
- December 2004–February 2008, after the dot-com bust;
- August 2009–March 2013, after the Great Recession;
- October 2018–June 2021;
- October 2022–February 2023, during post-pandemic
normalization.
The mechanism connecting these episodes is not
coincidence.
Figure 1
The peso's
sharpest depreciations coincide with technical stagflation—the 1983 debt
crisis and 1997 Asian crisis combining recession, inflation, financial stress,
and rising unemployment. (Figure 1, upper window)
The milder
depreciations track externally driven stagnation—the dot-com bust, Great
Recession, and pandemic recession.
In both cases, the currency functioned as a release valve, absorbing pressure the real economy
could not otherwise clear immediately.
What's different in 2026 is not the mechanism. It's how
long and deep this leg runs. The current depreciation trend traces back to 2021
— five years and counting. History offers no fixed template for how these
legs resolve: the 1983 debt-crisis depreciation ground on gradually for
over a decade, into 1996; the 1997 Asian crisis spike took seven years to work
through, into 2004. What decides the difference isn't the calendar.
The crux of the matter is whether BSP has the resources left to keep smoothing the path in the
face of the current degree of maladjustments. On that count, its position
looks more strained now than at either prior turning point — which leaves two
ways this can go: a sharp, disorderly snap once the smoothing capacity runs
out, or a long, grinding decline like 1983-1996. Which one, we don't know yet.
That it has to be one of the two is the point.
III. It Isn't the Dollar: The Peso Is Losing Ground to
Frontier-Market Currencies
Officials and the financial press default to the same
explanation for every leg down: dollar strength, Fed policy, a global
phenomenon the Philippines merely inherits.
That framing starts from the wrong end. It begins with a
correlation—the dollar moved, so the peso moved—and searches backward for the
most convenient cause rather than starting with the process generating the
price.
The right question isn't “why is the dollar strong.” It
is what is generating persistent demand
for dollars relative to pesos, specifically?
The week of this record made the point cleanly.
The US dollar index (DXY) was little changed
week-on-week—another leg down against the yen even as oil and Treasury yields
rose, but flat in aggregate as of September 11th.
Asian FX was mixed: the dollar gained against six of ten
regional currencies, itself little changed on net. USDPHP was the outlier at
the other end—a record Friday close, its third
straight Friday all-time high, achieved amid suppressed volatility. (Figure
1, lower image)
If this were simply a dollar-strength or broad-EM story,
the peso would be moving with the pack.
Instead, on a week the dollar itself was directionless,
USDPHP alone kept printing records.
That makes the
record a distinctly USDPHP story, not something adequately explained by Asian
FX or dollar strength alone.
Figure 2
The same divergence holds over a longer window: the Singapore dollar, Malaysian ringgit, and Thai baht have all
outperformed the peso; the Vietnamese
dong has been strengthening against the peso since May 2026. (Figure 2)
Figure 3
Even the Indonesian
rupiah—conventionally the region's “weak” currency—has been rising against
the peso since August 2026.
More strikingly, the Philippine peso has been weakening
against the Cambodian
riel since 2021 and the Lao
kip since 2024. (Figure 3)
The peso is therefore not simply underperforming
developed Asian currencies. It is
losing ground even against ASEAN frontier-market currencies! Incredible!
BusinessWorld/Bloomberg's
September 7 reporting makes the same point: the peso has been left behind
in Asia even as the region absorbs the same oil shock and dollar-reserve
pressures.
The common external shock is real.
It is simply not sufficient to explain the Philippine
outcome.
IV. The Peso’s Gold Test
The same divergence appears against gold.
The peso price of gold
has risen from under Php 10,000 in 1993 to roughly over Php 270,000 today.
(Figure 3)
Gold is not a fixed-price numeraire, but its supply is
not determined by Philippine monetary policy. A currency losing this much
ground against a monetary asset over three decades cannot have that loss
explained by short-term DXY movements.
It is that the long-run loss of purchasing power is a
different phenomenon from a temporary bout of dollar strength.
The dollar may explain a move.
It does not explain the trend.
V. The Soft Peg BSP Denies
BSP's official line is that it smooths
volatility and does not defend specific levels.
The historical ceiling data suggests something more
complicated.
Figure 4
USDPHP held a cap around 56.3 in 2004–05, around 59 from
2022 to 2025, and around 61.75 from May to July 2026. Three distinct ceilings,
each eventually breached, each followed by a fresh, higher ceiling. (Figure 4, upper
diagram)
That is not the behavior of a completely hands-off float.
It is the signature
of a managed, adjustable peg that BSP declines to call by that name. The
latest record streak reinforces the
point: it has come on suppressed volume and suppressed volatility — the
hallmark of intervention smoothing the path of depreciation, not an
absence of intervention. (Figure 4, lower window)
If pegs—even informal ones—contributed to the
external-debt buildup that culminated in the 1997
Asian crisis, a managed exchange
rate can reproduce part of that mechanism while buying more time before
the adjustment.
A peg (formal or
de facto) subsidizes the peso side of the ledger: it lowers the
effective cost of holding peso liabilities and raises the relative appeal of
dollar borrowing, because it dampens the FX-risk premium borrowers would
otherwise have to price in.
That mispricing does two
things simultaneously— it channels domestic policy toward being overused
(rate hikes held back, liquidity kept loose, because the peg is doing part of
the stabilizing work) or weakens its transmission signals and it builds up
external leverage that isn't compensated by a correspondingly higher return on
peso assets.
The result is a widening stock of dollar-denominated
exposure sitting on balance sheets that were never priced for the FX risk they
actually carry — the same imbalance that later shows up as a "wall of
maturities" and external debt (Section VII, below).
Governor Eli Remolona Jr. made the constraint explicit
when he said the
central bank could not simply force the peso back below Php 60 without
risking depletion of foreign-exchange reserves.
That is not a statement about smoothing volatility. It is
a statement about defending a level — phrased as a resource constraint
("we don't have the reserves to do it") rather than a policy choice,
but a level-defense admission all the same.
Read alongside the suppressed volume and volatility
accompanying the current record streak, the honest description of where policy
stands is a transition: from an explicit, defended soft-peg ceiling to a managed
— but still intervention-smoothed — slide.
BSP is no longer
holding a line; it is choreographing the pace of its retreat.
That sustained intervention is not incidental to the
price-suppression architecture this series has documented elsewhere (EO 110,
the CPI-suppression basket, the BSP regulatory-relief cascade) — it is another leg of the same scheme, aimed
at averting a disorderly, stagflationary FX shock.
But an intervention
that prevents the immediate shock does not remove the underlying mismatch;
it re-times it, and each re-timing layers
on more of the external-leverage buildup and mispriced FX risk described
above — a cost that must eventually clear through some balance sheet.
This is the same seen/unseen distinction Bastiat used to
unmask public spending: what's seen is the stable, orderly exchange rate — the
thing officials point to as evidence policy is working.
What's unseen is
where the cost of holding that rate stable actually goes: depleted
reserves, a growing stock of dollar liabilities on corporate and sovereign
balance sheets, savers earning less on peso assets than the currency risk
warrants. The peg's defenders only ever have to account for the seen half.
VI. What the GIR Data Actually Shows
BSP's Gross International Reserves history provides a
second line of evidence for how the peso has been managed.
Three developments stand out.
Figure 5
One. BSP sold gold reserves in 2020 and became the world's
largest sovereign gold seller in the first half of 2024. The latter episode
coincided with the period in which the peso was again weakening into new lows.
(Figure 5, upper pane)
Two. BSP also began leaning more heavily on Other
Reserve Assets—repos
and derivatives—from 2018 onward, coinciding with the October 2018–May 2021
peso rally. (Figure 5, lower chart)
And three, the National Government’s foreign-currency
deposits from fresh sovereign borrowing—the $2.5 billion eurobond, the $1
billion World Bank loan, and similar inflows—have repeatedly supported the
headline GIR figure, including in the latest August release.
These are not necessarily separate stories.
They describe point
to a crucial transition: as organic FX inflows — goods and services
exports, FDI, tourism, remittances, portfolio flows — have weakened, BSP has complimented
them with leverage (ORA positions and NG borrowing) and asset sales (gold).
The distinction that matters here is between a stock and
a flow.
GIR is a stock
— a balance-sheet snapshot that can be topped up through borrowing, derivatives
positioning, or selling down an existing asset.
Organic FX
generation is a flow — the ongoing, self-renewing output of a productive
economy.
A rising stock built on borrowed or sold-down components says nothing about whether the
underlying flow has improved; it can just as easily mean the flow has weakened badly
enough that the stock had to be propped up to disguise it.
The headline GIR number holds up. What holds it up has
changed.
The USDPHP has
been rising on the back of an increasingly ‘short’ BSP dollar position dressed
up as reserve strength — which is a materially different
reserve-adequacy story than the one implied by simply citing months-of-import
coverage.
The latest
GIR report, which rose from $103.3B in July to $104.8B in August, should be
an example. The surge in gold prices delivered all of the gains plus some
($1.6B), offsetting decreases in its foreign holdings.
The USDPHP is telling us which side of that balance sheet
is doing the adjusting.
It is revealing a deeper mismatch between the country's
demand for foreign exchange and its capacity to generate it.
VII. The Central Argument: This Is a Savings-Investment
Gap, Not an Oil Shock
Strip away the fuel‑subsidy and price‑suppression noise
and the underlying mechanism is the one this series has tracked since Part 1: a
deepening reliance on a Keynesian
savings‑investment gap development model — spending‑led growth financed by
debt rather than by real domestic savings — which politicizes and centralizes
capital allocation, entrenches malinvestments, degrades productivity,
discourages savings in favor of consumption, raises leverage across every
balance sheet it touches, and relies on financial
repression as part of capital consumption.
EO 110's price-suppression architecture, BSP's cascade of
regulatory and capital reliefs, the FX policies via NDF warnings, the 61.75
soft-peg ceiling, and a run of timid rate hikes are not independent policy
choices. They are the same mechanism applied to five different transmission
points at once — each one deferring an adjustment rather than making it.
The distinction that makes this more than a
Keynesian-labeling exercise is between statistical savings and real savings.
The national-accounts
savings rate is a residual of GDP accounting — spending minus consumption,
whatever that arithmetic yields. It says nothing about whether the economy has
actually set aside real resources — goods, capital, productive capacity — for
future production.
Production is
what generates the purchasing power to sustain demand in the first place; debt‑financed spending can inflate the
accounting residual — through money illusion — without creating a single
additional unit of real resource behind it.
When spending outruns what the economy has genuinely
saved, the gap between the two doesn't
disappear.
It has to surface
somewhere — and currently it is surfacing across fiscal deficits, trade
deficits, leverage, liquidity, weak investment, and currency depreciation
simultaneously, because these aren't eight separate problems. They are eight
readings of the same shortfall.
VIII. Eight Barometers of the Savings-Investment Gap
The evidence, current as of the most recent data:
Figure 6
One. Fiscal and
trade deficits. Seven-month/YTD fiscal
deficit (Php 893.1 billion) and trade
deficit ($37.338 billion) both at records; public
debt at an all-time high Php 19.389 trillion and at the second-highest
YTD accumulation since 2022, against the DBCC's full-year targets (deficit Php 1.658
trillion, debt Php 19.765
trillion) (Figure 6, top and middle panes)
Two. BOP
structurally deteriorating. The Balance of
Payments peaked in Q4 2020 — itself a pandemic-era anomaly — and has
trended toward deficit since 2011. The long trend line, not the 2020 spike, is
the relevant baseline. (Figure 6, bottom chart)
Figure 7Three. August
CPI’s marginal decline to 6.1% conceals more than it reveals. Beyond
the balance-sheet transfers, price suppression, and the FX peg already
discussed, headline CPI is further
distorted by money illusion and by sneakflation, skimpflation, and
shrinkflation — quantity and quality as well as benefit reductions and stealth
fees dressed up as stable prices.
The bottom-30%
income group absorbs a disproportionate share of the real adjustment CPI barely
captures. For instance, the food
CPI spread between the bottom 30% and the headline index surged to
its highest level since at least 2022 — suggesting a lower standard of living,
particularly for the lower class and the poor, while also exerting pressure on
the middle class. (Figure 7, topmost graph)
Four. Rising
global food prices. The Bloomberg Agriculture Spot Index recently
posted its largest monthly jump since the Arab Spring food-crisis era, and
the FAO
Food Price Index is at its highest since 2022, amid mounting supply risk. (Figure
7, middle image)
Because the Philippines imports a large share of its food
requirements, this is a direct transmission channel into both the trade deficit
and domestic food inflation — not a coincidental overlay. July's agricultural
trade deficit of $1.192 billion, the second-highest on record, is the
balance-of-payments face of the same pressure. (Figure 7, lowest visual)
Figure 8
Five. Liquidity
growth outrunning nominal GDP. Money
supply M-series liquidity growth had eased slightly by July but remains in
double digits — still outpacing nominal GDP growth, even before the Iran oil
shock is layered on top. Excess
liquidity is the primary driver of rising general prices; supply
bottlenecks compound rather than originate the pressure, and the peso absorbs
the resulting imbalance through the same feedback loop described above. (Figure
8, topmost window)
This is where the exchange rate stops being a passive
readout: loose liquidity feeds import
demand and price pressure, which weakens the peso, which raises import costs,
which policy then responds to with more intervention — and that intervention
itself becomes a new input into the fundamentals it was meant to merely observe.
The political regime isn't managing an external process from outside it; it is the process — the essence of the
imbalance, not an observer of it.
Six. Labor market deterioration. July’s
unemployed population rose to a post‑pandemic‑era high (February
2022/December 2021) as participation rates slow — a labor‑market crack
surfacing despite a price‑suppression regime that delivered 2.3% Q2 GDP and
2.6% first‑half GDP. Growth this administered should not be producing rising
joblessness. That it is tells you the suppression is masking weakness, not
curing it. (Figure 8, second to the highest image)
The NCR hike is only
the most recent installment in a running series of national minimum-wage
increases, and the mechanism here isn't limited to weakening savings. A wage floor set above what productivity in
the affected sectors can support functions as a regulatory tax on capital —
it raises the cost of employing labor without a matching gain in output, and
employers absorb that through slower hiring, automation, or informalization
instead. That compounds the
savings-investment gap from a second direction: capital gets penalized
directly, and the standard of living
falls for the workers the policy was meant to protect, not just for savers
holding depreciating peso assets.
Seven. Wall of Maturities (Corporate FX Debt).
BSP’s own 2025
Financial Stability Report flags “sizable foreign‑currency exposures, with
US dollar‑denominated debt averaging 37.6% of conglomerate debt” over the
coming five years. That is precisely the external‑leverage buildup the soft‑peg
mechanism in Section III predicts. Vista
Land’s proposed sale of two non‑core malls is an early, visible symptom of the
liquidity and solvency strain this exposure is starting to produce — not an
isolated corporate decision.
Eight. External Debt Pressures (Macro Leverage).
The external
debt stock rose to $154.9 billion as of June 2026, the highest on record,
up from $147.4 billion a year earlier— and now roughly 48% larger than the
$104.7 billion GIR that's supposed to be the country's reserve cushion against
exactly this kind of external exposure. (Figure 8, second to the lowest pane)
Yet, the composition matters more than the headline:
medium‑ and long‑term borrowings dominate ($134.3B), and the public sector
alone accounts for $92.8B — showing that the national government has become the
primary driver of external leverage. Private
corporates and banks are crowded into the same FX pool, but it is sovereign
borrowing that now sets the tone. (Figure 8, lowest graph)
Bondholders and multilaterals are the largest creditors —
$49.2B owed to bond markets, $43.2B to multilaterals — underscoring dependence on volatile capital markets and crisis‑era
financing that has quietly become structural.
What looks like financing is in fact capital consumption: debt service ratios rise, GIR adequacy is
flattered by borrowed inflows, and the peso’s weakness is the balance‑sheet
readout of a system living on external leverage.
The corporate wall of maturities (#7) and the sovereign
external-debt buildup (#8) aren't separate problems — one is the micro expression of the same mechanism the other expresses
at the macro level. Organic savings and FX generation have slowed, so the
system substitutes debt. Leveraging doesn't create new resources. It only
layers fragility across every balance sheet it touches.
Every one of these
data points is downstream of the same root cause: organic revenue
generation has been slowing while the system crowds out savings, tightens the
competition for what capital remains, and accumulates malinvestment and
balance-sheet mismatches that a suppressed exchange rate and a suppressed CPI
print cannot make disappear — only relocate.
Notice the pattern that recurs across three separate
statistics in this piece: CPI, GDP, and GIR. In each case, the headline number
can improve — or hold steady — while the underlying capacity it's supposed to
represent does not.
- CPI doesn't
capture sneakflation, shrinkflation and skimpflation;
- GDP doesn't
distinguish debt-financed spending from genuine productive capacity;
- GIR doesn't
distinguish organic FX flow from borrowed or sold-down stock.
The representation starts standing in for the reality
it's supposed to describe, and policy gets evaluated against the representation
instead. That substitution is not an accident of measurement. It is what makes price suppression look
like it's working, right up until the exchange rate — the one price left that's
hardest to fully administer — starts printing the difference.
None of this is likely to unwind on its own. Interventions introduced as temporary
crisis responses have a well-documented tendency to become permanent features
of the policy landscape once the crisis passes: price controls become policy,
regulatory relief becomes precedent, liquidity support becomes an expectation,
and FX intervention becomes simply how the market is understood to operate.
Each of the mechanisms catalogued above — EO 110, the BSP relief cascade, the
soft-peg ceilings, the ORA-and-borrowing-propped reserves — was introduced to
manage a specific, bounded stress.
None of them shows signs of being unwound now that the
stress has evolved into something more chronic. That is how a set of emergency
measures quietly becomes the baseline the economy is now structurally dependent
on.
IX. The Strawman Defense
When asked directly, the administration doesn't deny the
peso's weakness is connected to spending. It reframes the causality.
Malacañang's response to the peso's earlier close at Php 62.56 was that the
government remains focused on "fiscal discipline and
more efficient use of public funds" — a line issued the day after that
record close — conceding the timing, not the mechanism, and substituting an
efficiency claim for the deficit and debt figures documented above.
Other coverage leans on imported
inflation and self-attribution bias — as if the oil shock explains the
weakness on its own, rather than exposing a structural vulnerability that was
already there. Trickle-down and imported-inflation framings both mislead in the
same direction: they treat symptoms of
the savings-investment gap as if they were independent, external causes. The oil shock didn't
create the vulnerability. It exposed the belly that was already soft.
X. Conclusion: The Pressure Valve, Again
None of this is new in kind — only in scale and duration.
The peso has always functioned as the pressure-release
valve absorbing the strains the rest of the system won't adjust to directly.
What officials present as monitoring, smoothing, and prudent reserve management
is, read against the reserve composition, the ceiling history, and the
twin-deficit trajectory, a policy of financing today's imbalances with
tomorrow's leverage.
The 24th record of
the year won't be the last.
The relevant
question for readers isn't when the next one comes. It's what balance sheet
— household, corporate, or sovereign — absorbs the difference when the leverage
funding this "stability" runs out of room.
The peso isn't
creating the imbalance. It is clearing it.
The record
USDPHP is not merely a currency story. It is the stagflation story — priced in
pesos.
___
Last three stagflation series:
Stagflation
Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt,
Real Stagnation, August 30, 2026
Stagflation
Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt,
August 9, 2026
Stagflation
Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment,
August 2, 2026
Figure 6: stockcharts.com: Inflationary Landscape?
