Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

 

The picture of the free market is necessarily one of harmony and mutual benefit; the picture of State intervention is one of caste conflict, coercion, and exploitation—Murray N. Rothbard

 In this issue:

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

I. Crisis Without a Crisis

II. Oil Shock Politics and Organized Interests

III. The Ratchet Effect of Crisis Policy

IV. The Oil Shock Is Already Affecting the Real Economy

V. When Price Signals Are Suppressed

VI. Interventions Beget Interventions

VII. Markets Are Already Responding

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions 

“Crisis Without a Crisis”: As officials urge calm, subsidies, price caps, and emergency policies spread across the economy. 

I. Crisis Without a Crisis 

The Marcos administration is urging the public not to panic: "Everything is normal. No need to hoard." 

Officials have repeatedly warned consumers against hoarding while insisting that the Philippine economy remains stable despite the surge in global oil prices. 

Yet the government’s own policy actions suggest a very different reality. 

Within days of the oil shock, authorities introduced a rapidly expanding set of interventions across multiple sectors of the economy: 

• fuel subsidies for transport operators, with discussions of extending support to commuters
• suspension of public transport fare increases
• 50 percent fare discounts for MRT and LRT passengers
• suspension of toll rate hikes and applying steep discounts
• investigations into gasoline stations accused of overpricing, imposing early unauthorized price hikes, and carrying out sudden closures
• voluntary price freezes from processed food manufacturers
• discussions on imposing price caps on imported rice
• plans to suspend mandatory biofuel blending requirements
• and signals from the Palace that a state of emergency remains under consideration 

At the same time, the political debate is widening. 

Senator Tito Sotto has filed legislation to repeal the Oil Deregulation Law, while economist Winnie Monsod has proposed a wealth tax to finance expanding subsidies. 

Taken together, these measures resemble a broad attempt to suppress the transmission of rising energy costs throughout the economy. 

But the deeper story may lie in the political incentives behind such policies. 

II. Oil Shock Politics and Organized Interests 

The response to the oil shock reflects dynamics long described by political economist Mancur Olson. 

In Olson’s theory of collective action, small, well-organized interest groups often exert disproportionate influence over economic policy. Because their benefits are concentrated while the costs are widely dispersed, these groups are able to secure subsidies, protections, or regulatory advantages from government. 

Energy shocks tend to accelerate this process. Some examples: 

• Transport operators seek subsidies to offset fuel costs.
• Food producers lobby for relief from input price pressures.
• Agricultural sectors push for price supports.
• Infrastructure operators also seek regulatory relief when shocks threaten profitability. 

For instance, the Energy Regulatory Commission (ERC) is considering power rate adjustments in April that would allow utilities to recover rising generation costs and financial losses. Similar pressures have already appeared in earlier policy discussions—from real property tax (RPT) relief for power producers to increased GEA-All subsidies benefiting renewable producers, as well as negotiated asset transfers in the SMC–Meralco–AEV energy deal—illustrating how fragile sectors increasingly rely on regulatory protection when market conditions deteriorate. 

Each group frames its demands as necessary for stability, employment, or consumer protection. 

The result is an expanding patchwork of sector-specific interventions. 

Individually, each measure may appear justified. Collectively, however, they create a growing system of economic management in which prices and incentives are increasingly shaped by political decisions rather than market signals. The result is an expanding patchwork of sector-specific interventions. Intensifying competition for public resources drives rising demands for government spending, crowding out the productive economy and accelerating the centralization of the economy. 

III. The Ratchet Effect of Crisis Policy 

Economic historian Robert Higgs described a recurring pattern in government responses to crises: what he called the "ratchet effect." 

During emergencies—wars, financial crises, pandemics, or commodity shocks—governments introduce extraordinary interventions to stabilize politically sensitive sectors of the economy. These measures are typically framed as temporary responses to exceptional circumstances. 

Yet once the crisis subsides, the state rarely returns fully to its previous size or scope. 

Instead, some interventions remain in place, while others leave behind new fiscal commitments, regulatory authorities, or political expectations of continued support. Each crisis therefore pushes the boundary of government involvement forward in a stepwise fashion—much like a mechanical ratchet that moves only in one direction. 

The Philippines’ pandemic episode illustrates this dynamic clearly.

Figure 1

During the COVID crisis, fiscal deficits widened to record levels, justified as emergency stimulus designed to cushion the economic collapse. (Figure 1, upper window) 

Yet much of that spending expansion became structurally embedded in the fiscal framework. Political pressures for continued subsidies and transfers, created under the purview of social democratic free-lunch politics, have made these programs difficult to unwind even after the emergency has passed. 

As a result, the country’s savings–investment gap widened to unprecedented levels, financed by historically high public borrowing and still-elevated liquidity conditions, as reflected in measures such as the M2-to-GDP ratio. These dynamics have increased the economy’s sensitivity to inflation while intensifying crowding-out pressures already evident in domestic output, consumption, and credit markets. 

Energy shocks historically amplify this ratchet dynamic. 

Subsidies introduced to stabilize transport costs become permanent programs. Temporary price controls evolve into long-term regulatory oversight. Emergency fiscal transfers create new political expectations that governments will shield key sectors from market fluctuations.

The Philippine response to the current oil shock risks reinforcing this pattern. Policies such as fare subsidies, price caps, toll suspensions, and regulatory enforcement may begin as short-term measures to contain inflation and social unrest. 

But once introduced, they often prove politically difficult to reverse. 

Over time, repeated crisis interventions accumulate into a broader system of economic management—expanding the role of the state while leaving the underlying structural vulnerabilities unresolved. 

IV. The Oil Shock Is Already Affecting the Real Economy 

Signs of strain were emerging. 

Automobile sales had already begun to decline, even before the latest surge in oil prices, suggesting that rising fuel costs have yet to add to the erosion of discretionary consumption. (Figure 1, lower chart) 

Transport activity is now reflecting the same pressures. 

Reports indicate that the MMDA expects vehicle traffic in Metro Manila to decrease by around 30,000 units. Meanwhile, bus trips at the Parañaque Integrated Terminal Exchange (PITX) have dropped significantly, as operators scale back services and commuters reduce their travel. 

Air travel is also absorbing the shock. Airlines have begun imposing higher jet fuel surcharges, raising the cost of domestic and international flights. 

The shock is also beginning to affect overseas labor flows. Filipino workers continue to be repatriated from conflict areas in the Middle East, with roughly 2,000 overseas Filipino workers (OFWs) already returning to the country. While still modest in scale, such movements highlight another channel through which geopolitical shocks can affect the Philippine economy. Remittances from OFWs have long served as a stabilizing source of foreign exchange for the peso. Disruptions to overseas employment—particularly in energy-sensitive regions—therefore risk amplifying pressures already visible in labor, currency and financial markets. 

These adjustments illustrate the normal transmission mechanism of an energy shock: rising fuel prices ripple through transport, logistics, and consumer spending. 

Instead of allowing those adjustments to occur through price changes, the government is intervening across multiple points in the transmission chain. 

V. When Price Signals Are Suppressed 

Economists such as Friedrich von Hayek emphasized that prices function as a decentralized information system: "the knowledge of the particular circumstances of time and place." 

Prices communicate knowledge about scarcity, costs, and consumer preferences across millions of economic actors. 

When governments suppress those signals—through fare freezes, price caps, subsidies, or regulatory pressure—the information embedded in prices becomes distorted. 

Consumers may continue to demand goods whose true costs are rising. 

Producers may reduce supply when prices no longer cover costs. 

Adjustments that would normally occur through prices instead emerge as reduced service, shortages, declines in quantity or quality, and even fiscal transfers. 

In this sense, partial price controls recreate elements of the problem identified by Ludwig von Mises in his critique of socialist planning: when prices are manipulated, rational economic calculation becomes increasingly difficult. As the great Mises explained, 

Without calculation, economic activity is impossible. 

VI. Interventions Beget Interventions 

Once price controls begin to distort economic signals, additional interventions often follow. 

This dynamic was emphasized by Murray Rothbard, who argued that government interventions frequently generate secondary effects that policymakers then attempt to correct with further interventions. 

• Fare caps create losses for transport operators, prompting subsidies.
• Price freezes create supply pressures, prompting enforcement actions.
• Rising fiscal costs generate calls for new taxes or regulatory changes. 

Each policy attempts to fix the unintended consequences of the previous one. 

Over time, what begins as a limited intervention can evolve into a broad regime of economic management, representing a gradual transition toward centralization. As the dean of Austrian economics, the great Murray Rothbard wrote,

Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve. This is a general economic law of government intervention. 

VII. Markets Are Already Responding 

While policymakers attempt to stabilize prices and shield consumers from the oil shock, financial markets appear to be reacting to the broader macroeconomic implications.

Figure 2

The PSEi 30, the primary equity benchmark of the Philippine Stock Exchange, has declined, although the drop has been relatively muted—likely reflecting institutional support and collateral management dynamics. (Figure 2, topmost graph) 

Other markets are sending a more cautionary signal. The peso has weakened significantly, with the USD/PHP exchange rate reaching a record high of 60.1 this week, making it one of the worst-performing currencies in Asia. 

At the same time, the government bond market has undergone a structural shift. 

Philippine Treasury yields have moved from bearish flattening to bearish steepening, with long-term yields rising faster than shorter maturities over the past week. Such shifts often reflect growing concerns about inflation persistence, fiscal sustainability, or sovereign risk. (Figure 2, lower chart)

Figure 3

As of March 19, Philippine 10-year Treasuries ranked as the worst-performing bond market segment in Asia (Figure 3, upper table) 

Although the current spike in T-bill yields may not yet prompt a response from the BSP, it is important to note that its policies are shaped more by market developments than by its own actions. The directional movement of one-month T-bill yields has historically preceded BSP policy shifts, including rate cuts in 2018 and 2023–2024, and rate hikes in 2022. (Figure 3, lower image) 

Thus, if the upward trajectory of T-bill rates persists, rate hikes are likely to come onto the BSP’s radar.

Figure 4

These concerns are not unfounded. The Philippines already faces record debt-service burdens amid persistent fiscal deficits. (Figure 4, topmost pane) 

Expanding subsidies and price controls risk adding further pressure on the government’s balance sheet. 

According to ADB data, the Philippines has recorded the largest increase in credit default swap (CDS) spreads since the outbreak of the Middle East conflict—indicating that markets are pricing in higher default risk for Philippine debt. (Figure 4, middle and lower charts)

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

What is unfolding may not simply be a temporary response to a spike in global oil prices. 

Rather, the episode illustrates how modern interventionist economies evolve when confronted with external shocks. 

As Mancur Olson observed, mature political systems tend to accumulate powerful distributional coalitions—organized groups capable of securing targeted protections, subsidies, and regulatory advantages from the state. Energy shocks often accelerate this process as sectors facing sudden cost increases mobilize to shift those costs elsewhere. 

The result is a widening network of state interventions designed to stabilize politically sensitive sectors. 

But crisis interventions rarely remain temporary. Economic historian Robert Higgs described this dynamic as the ratchet effect: during periods of emergency, governments expand their role in managing the economy, and once the crisis passes, those powers rarely return fully to their previous limits. 

Each shock therefore leaves behind a larger structure of fiscal commitments, regulatory authority, and political expectations of continued support. 

Once prices begin to be suppressed in this way, the informational role of markets deteriorates—a problem emphasized by Friedrich Hayek. Prices no longer convey reliable signals about scarcity and cost, making economic coordination increasingly difficult. 

This is where the broader critique developed by Ludwig von Mises becomes relevant. When governments repeatedly intervene to correct the unintended consequences of earlier policies, economic management gradually expands across more sectors of the economy. Mises described this process as the dynamic of interventionism—a cycle in which policy distortions generate new problems that invite further intervention. 

The Philippine response to the oil shock increasingly reflects this pattern. 

• Fare caps require subsidies.
• Price freezes invite enforcement.
• Rising fiscal costs trigger proposals for new taxes or regulatory changes. 

Each populist band-aid policy attempts to stabilize the distortions created by the previous one. 

What emerges is not a single intervention but an expanding system of economic management—one reinforced by the ratchet effect of successive crises. 

And when such systems face external shocks—particularly commodity shocks that simultaneously affect inflation, trade balances, and fiscal accounts—the pressures tend to migrate toward the weakest macroeconomic points: the government’s fiscal position, the sovereign debt market, and the currency. 

The oil shock may therefore be revealing something deeper about the Philippine economy. 

Rather than simply confronting higher energy prices, policymakers appear to be navigating the accumulated tensions of an interventionist regime already stretched across multiple sectors—and increasingly across the economy as a whole. 

Suppressing the immediate price effects of the shock may buy time—but it also risks amplifying underlying maladjustments. 

Importantly, it cannot eliminate the adjustment the economy must eventually make. At best it postpones that process, increasing the risk that the eventual correction will be larger and more disorderly. 

And markets—especially currency and sovereign bond markets—tend to recognize that reality long before policymakers do.

 

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

 

Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity's greatest achievements and provoked some of its worst crimes. When we use gold to symbolize eternity, it elevates people to greater dignity—royalty, religion, formality; when gold is regarded as life everlasting, it drives people to death—Peter L. Bernstein 

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

I. The Muted Signal

II. Two Gold Markets

III. The Clearing Infrastructure

IV. When Logistics Stress Becomes Financial Stress

V. The Collateral Squeeze

VI. The Dollar as Lightning Rod

VII. Fragmentation, Not Failure

VIII. What the Quiet Is Actually Saying

VIIIA. Post Script: "There is No Haven" 

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I) 

Oil is surging, the dollar is rising—and gold isn’t responding. The explanation lies in liquidity stress, collateral dynamics, and the plumbing of the global bullion system.

I. The Muted Signal 

Long regarded as a safe haven, gold is expected to shine in times of crisis—particularly amid geopolitical shocks such as the escalating tensions surrounding the U.S.–Israel–Iran conflict.

Yet as instability deepens in the Middle East, a curious divergence has emerged. Oil prices have surged, and the U.S. dollar has strengthened, but gold has remained conspicuously subdued. 

For many observers, this raises an uncomfortable question: has gold lost its safe-haven status? 

The answer is almost certainly no. What we are witnessing instead is a familiar—but often misunderstood—dynamic in times of financial stress. Gold does not operate within a single, unified market responding to a single force. Rather, it exists at the intersection of multiple systems—monetary, financial, and physical—each reacting differently under pressure. 

To understand gold’s apparent silence today, one must move beyond the simplistic safe-haven narrative and examine the underlying mechanics of how crises actually unfold. 

II. Two Gold Markets 

Gold is not a single market. It is two markets operating simultaneously. 

The financial layer consists of futures traded on COMEX, forward contracts cleared through the London bullion system, and gold ETFs. Prices here move primarily in response to macro variables: the dollar, real interest rates, and shifts in global risk sentiment.

Figure 1

The resurgence in global gold ETF flows early in the year highlights the responsiveness of this financial layer to momentum, liquidity, and broader macroeconomic signals. (Figure 1, upper chart)

Unlike physical markets, positioning here can expand rapidly and at scale, without the need for underlying physical settlement, largely unconstrained by the frictions of moving and storing metal. Yet this flexibility stands in contrast to the more constrained and regionally fragmented nature of physical gold markets—a divergence that becomes evident when comparing pricing across Shanghai and London. 

The physical layer operates very differently. It consists of doré bars produced by mines, bullion refined in Switzerland, jewelry demand across Asia, and steady accumulation by central banks. This layer depends on transportation networks, refinery throughput, vault logistics, and customs clearance. 

Even at the level of demand, gold is not unified. As shown by the World Gold Council, demand is structurally divided across investment, jewelry, and industrial uses—each driven by distinct economic forces and time horizons. (Figure 1, lower graph) 

Figure 2

Rather than moving in lockstep, Shanghai and LBMA pricing in early 2026 oscillated between premium and discount. This back-and-forth reflects a market where arbitrage is active but not seamless—revealing, in practice, the dual structure of gold as both a financial asset and a physical commodity. (Figure 2) 

Under normal conditions, arbitrage keeps these two layers aligned. When physical premiums emerge in Asia or the Middle East, traders move gold to capture the spread, transmitting local signals back into global benchmarks. But when logistics slow or uncertainty rises, that alignment weakens. Physical markets may tighten even as financial benchmarks remain anchored to macro forces. 

III. The Clearing Infrastructure 

The global bullion system relies on a relatively concentrated infrastructure. 

London dominates price discovery through the clearing system associated with the London bullion market, while Switzerland refines a large share of the world’s doré into internationally tradable bars. Logistics hubs in the Gulf, in turn, connect African supply with major consumer markets in Asia. 

This network typically functions smoothly because gold flows continuously between these nodes. 

Figure 3

In effect, the bullion system operates as a hub-and-spoke network: Switzerland serves as a dominant refining center processing a substantial share of global supply, while London anchors pricing and clearing. This concentration enhances efficiency, but also creates critical points of vulnerability. 

When transport routes are disrupted or regional stability deteriorates, those vulnerabilities become visible. 

Geopolitical tensions in the Middle East have begun to complicate these flows. Even partial restrictions on cargo routes or airspace can slow the movement of metal between mining regions, refineries, and end markets. 

In a system where arbitrage depends on the physical movement of bullion, even modest friction does not simply delay flows—it weakens the transmission of price signals between markets. 

IV. When Logistics Stress Becomes Financial Stress 

Disruptions in the physical gold market rarely remain isolated. 

When the movement of metal becomes uncertain, arbitrage trades that normally link markets turn riskier. Traders who once relied on seamless transfer between regions suddenly face basis risk, as the cost and timing of moving bullion becomes unpredictable. 

Clearinghouses respond in the only way they can: by demanding additional collateral. Margin calls follow. 

To meet these calls, participants often liquidate the most liquid assets available—typically dollar-denominated instruments. 

What begins as a logistical friction in the physical market thus propagates into the financial system, triggering a collateral-driven tightening that can ripple across broader markets. 

Disruptions in the physical market do not remain isolated. 

V. The Collateral Squeeze 

Gold occupies a unique position in global finance. It is simultaneously a commodity, a reserve asset, and a form of high-quality collateral used across derivatives, repo agreements, and bullion banking. During periods of market stress, this collateral role can temporarily dominate its safe-haven function. 

Three mechanisms typically drive this dynamic: 

• Forced liquidation. Institutions facing margin calls sell the most liquid assets available. Gold is often among the first assets sold—not because confidence in it has vanished, but because it can quickly raise cash. 
• Haircut widening. When volatility rises, clearinghouses increase the discount applied to gold posted as collateral. Positions that were previously adequately margined can suddenly require additional coverage, forcing further liquidation 
• Tightening in the gold lending market. Bullion banks regularly lend gold through swaps and leases. Under stress, these channels can constrict as counterparties become more cautious. 

A current illustration of these dynamics comes from Dubai. Recent reports show that shipments of gold have been delayed due to regional logistical bottlenecks, rising insurance premiums, and higher financing costs amid Middle East tensions. 

Physical gold that is stuck or delayed can be sold locally—often at a discount—to meet liquidity needs even while global confidence in gold remains intact. This episode demonstrates how frictions in the physical market can amplify financial pressures, turning bullion into a source of immediate cash rather than a stable safe-haven. 

These collateral-driven dynamics are not unprecedented. Similar patterns emerged during the global financial crisis, the European sovereign debt crisis, and the market dislocations of 2020. In each case, gold initially weakened during the liquidity phase of the shock before later reasserting its safe-haven role. 

Financial instability theorist Hyman Minsky argued that crises often begin with a scramble for liquidity, forcing investors to sell even high-quality assets to meet obligations. Gold’s early weakness during crises—including today’s Dubai example—fits squarely within this pattern. 

VI. The Dollar as Lightning Rod 

A common explanation for gold’s weakness is that investors fled into U.S. Treasuries, strengthening the dollar.

Figure 4

The broader market picture suggests something different. Bond markets have not been rallying strongly. To the contrary, yields across many sovereign markets have risen as investors reassess inflation risk and fiscal sustainability following the oil shock. (Figure 4, upper image) 

The dollar’s strength reflects another mechanism. The global financial system is largely funded in dollars. (Figure 4, lower diagram) 

When volatility rises and leveraged positions unwind, institutions need dollars to meet margin calls and settle obligations. 

Capital flows into the dollar not necessarily because it is safe, but because it is required. The dollar therefore acts less like a haven and more like a lightning rod for global liquidity stress. 

Recent market behavior reinforces this dynamic. Episodes of rising dollar demand have coincided with sharp declines in gold prices and tightening cross-currency funding conditions—an indication that global markets are paying a premium to access dollars. 

These moves suggest that what appears to be gold weakness is in fact a symptom of a broader liquidity squeeze, in which institutions sell liquid assets to obtain dollars needed to meet obligations. 

Figure 5 

Historical patterns support this interpretation. Gold has often declined during the initial phase of major financial stress events, including the global financial crisis and the pandemic shock, before rallying as liquidity conditions stabilize. (Figure 5) 

Even gold can be temporarily liquidated in this environment, illustrating how financial liquidity dynamics can dominate its intrinsic safe-haven appeal. 

VII. Fragmentation, Not Failure

Figure 6 

Another structural trend may be shaping gold’s muted response. 

Central banks continue to accumulate gold, extending a multi-year pattern of reserve diversification, although the pace of purchases has moderated in recent months. (Figure 6) 

This suggests that while the strategic bid for gold remains intact, accumulation is becoming more measured—less urgent, more sensitive to price and liquidity conditions. 

At the same time, new trading corridors have gradually developed outside the traditional Western clearing system. Asian markets frequently trade at premiums to London, while regional demand and policy dynamics increasingly influence the movement and pricing of physical gold. 

Taken together, these developments point to a gradual shift toward a more multipolar bullion market. Disruptions to established logistics routes may accelerate this transition, encouraging alternative trading channels and settlement infrastructure. 

This signal that the architecture of the gold market is evolving—away from a single, tightly integrated system toward a more fragmented landscape, where multiple hubs and pathways shape pricing, flows, and accumulation decisions. 

While the trajectory of central bank gold policy remains uncertain under current conditions, a stronger dollar and rising fiscal demands—whether from defense spending or domestic support—may incentivize some central banks to mobilize gold reserves for liquidity. 

Yet these same conditions—intensifying geopolitical fragmentation and rising monetary risk—may reinforce the opposite impulse: to accumulate gold as insurance, as a hedge against currency volatility, or as part of a broader strategy of reserve diversification away from the dollar. 

This tension reflects a deeper uncertainty. Whether central banks become net sources of liquidity or continue as structural buyers will depend on how the current crisis evolves—whether it remains a liquidity event or transitions into a broader monetary regime shift. 

VIII. What the Quiet Is Actually Saying 

Gold’s muted reaction to current geopolitical tensions is not a failure of its safe-haven role. It is a signal—just not the one most investors are looking for. 

What we are observing is the early phase of a crisis in which liquidity demand, dollar funding pressures, and market microstructure dominate price formation. In this phase, assets are not repriced based on long-term risk, but on immediate funding needs. 

History suggests that these phases do not persist indefinitely. Energy shocks, financial stress, and monetary instability tend to unfold sequentially, not simultaneously. 

If current tensions deepen into broader economic and financial disruption, the forces suppressing gold today may reverse. The same mechanisms driving liquidity demand—margin calls, collateral tightening, and dollar scarcity—often give way to monetary easing and balance sheet expansion. 

It is typically at that point—not during the initial scramble for liquidity—that gold reasserts its role. 

The signal is not absent. It is delayed. 

Gold is not failing as a safe haven—it is being temporarily subordinated to the needs of a dollar-based financial system under stress 

VIIIA. Post Script: "There is No Haven" 

Recent market behavior reinforces this interpretation. In the past week, the dollar, gold, U.S. Treasuries, bitcoin, and oil have all weakened simultaneously. 

In normal circumstances, at least one of these assets would function as a refuge. When all of them decline together, the signal is different: markets are not seeking safety—they are seeking liquidity. 

In other words, the system is still in the scramble-for-cash phase of adjustment or at times like this, markets behave as if no haven exists at all.

 

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

 

People always look for political solutions to economic problems. Economic solutions are individually based; they amount to producing more and consuming less. Political solutions are collectively based; they amount to some people deciding how much wealth to take from some other people. The question is, how do political solutions manifest themselves?—Doug Casey 

In this issue

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks 

I. War, Oil, and Markets: The Shock Transmission Spreads

II. Stagflation Ahoy! Employment Weakens as Inflation Surges

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface

IIIA. Bank Liquidity Buffers Are Thinning

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling

IIIB.1 Liquidity Detaches From Credit

IIIB.2 External Liquidity Replaces Domestic Credit

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission

IIID. A Financial System Becoming Balance-Sheet Driven

IV. The Yield Curve’s Hidden Message

V. Oil Shock as the Catalyst for a Banking System Test

VI. The Policy Dilemma Ahead

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility  

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

The oil shock from the Middle East war exposes underlying financial strains in the Philippine economy, evident in the weakening peso, tightening bank balance sheets, and a shifting yield curve.

I. War, Oil, and Markets: The Shock Transmission Spreads 

Figure 1

Since the latest outbreak of the Middle East conflict involving US, Israel on Iran, global oil markets have repriced sharply. The US WTI and Brent Oil benchmarks have traded slightly below and above the $100/barrel. (Figure 1, topmost chart) 

For an import-dependent economy like the Philippines, the transmission mechanism was immediate. 

Three domestic market reactions stand out. The ‘oil shock’ aggravates the structural pressure from persistent external deficits from the deepening savings-investment gap imbalances 

First, the peso plunged to a record low against the dollar, with the USD/PHP exchange rate surging to 59.735, the highest level on record. (Figure 1 middle graph) 

The move reinforced the breach of the Bangko Sentral ng Pilipinas’ (BSP) 59-level “Maginot Line,” a ceiling the central bank had defended from 2022 through late 2025. 

The March 13 breakout was accompanied by interbank trading volume jumping 16% to roughly $2.23 billion, marking the fifth-largest turnover since 2025 amid the pair’s sharp upward spiral this March. 

Notably, earlier breakouts were rarely accompanied by comparable surges in trading volume, likely reflecting BSP interventions in the market. (Figure 1, lowest image) 

In contrast, the current episode appears to signal strong underlying demand for the US dollar, suggesting that momentum could soon put the 60 level to an immediate test. 

The oil shock further aggravates these pressures, compounding the peso’s weakness alongside persistent external deficits stemming from a widening savings–investment gap. 

Second, domestic equities began to unravel. 

The PSEi erased most of its early-year gains (+0.1% YTD as of March 13), as the prospect of higher energy costs—on top of rising inflation, weaker GDP growth, currency volatility, tighter financial conditions, and continued foreign selling—dampened sentiment and offset earlier orchestrated pumps of the index.

Figure 2 

Third, the domestic bond market began adjusting to mounting inflation risks. Philippine government securities sold off across the curve, while the yield curve reshaped itself through a bearish flattening—a configuration that typically signals rising financial stress rather than healthy growth expectations. (Figure 2, top and middle visuals) 

In short, markets quickly priced the oil shock not as a temporary disturbance, but as a binding macroeconomic constraint.

II. Stagflation Ahoy! Employment Weakens as Inflation Surges 

The ‘oil shock’ arrives precisely as the domestic economy is already emitting stagflationary signals. 

Inflation accelerated again in February. Philippine CPI rose to 2.4%, marking the fourth consecutive monthly increase and a 13-month high.

Figure 3

More alarming was the surge in food inflation for vulnerable households. Food CPI for the bottom 30% income group spiked from 0.6% in January to 2.2% in February, suggesting rising hunger and worsening self-rated poverty among a substantial share of families—despite the rollout of Php 20 rice programs and government-mandated maximum suggested retail prices (MSRPs). (Figure 3, topmost window) 

Crucially, these developments occurred before the oil shock. Yet the first wave of its impact is already visible:

• staggered ‘jumbo’ fuel price increases
• ferry operators beginning to raise fares
• gasoline stations reportedly hiking prices ahead of authorized adjustments
• the Department of Trade and Industry (DTI) warning against hoarding and profiteering
• Meralco announcing another power rate hike on top of January’s GEA-related increase
• Water Utilities, Maynilad and Manila Water to raise rates in the second quarter 

A further inflation risk lies in agricultural inputs. The Philippines remains heavily dependent on imported urea fertilizer, much of it sourced from the Gulf region. (Figure 3, middle diagram) 

Any disruption to supply chains or price spikes linked to Middle East tensions could raise production costs for domestic agriculture, creating second-round pressures on food prices in the months ahead. 

And more drastic adjustments are likely to follow. The snowballing effects and feedback loops from higher energy costs could feed into what may become the third wave of Philippine CPI cycle.

Figure 4

At the same time, as the GDP wobbles, labor market conditions are deteriorating. Unemployment rose to 2.96 million in January 2026—a pandemic era high, while underemployment also increased. Employment rate fell to 94.2%, lowest since June 2022 (Figure 4, topmost image) 

More concerning are the sectoral shifts beneath the headline numbers:

• agricultural employment contracted (Figure 4, middle chart)
• trade employment declined sharply
• labor force participation fell, suggesting that official unemployment figures may understate actual labor slack (Figure 4, lowest image)
• displaced workers increasingly moved into lower-productivity informal sectors 

Rising fertilizer costs also threaten agricultural employment and output, compounding the deterioration already visible in rural labor markets. 

These shifts are critical because they indicate weakening household income capacity precisely as prices for essential goods—fuel, electricity, and water—are rising. 

Moreover, with conflict in the Middle East ongoing, more overseas Filipino workers (OFWs) are being repatriated. This is not merely a humanitarian issue—it also carries macroeconomic consequences. 

As repatriations increase, returning workers expand the domestic labor pool, potentially pushing unemployment or underemployment higher. 

At the same time, fewer workers abroad could mean weaker remittance inflows, widening the Philippines’ balance-of-payments (BoP) deficit—a consequence of its savings-investment gap—and intensifying pressure on the peso.

Remittances are a key pillar of household consumption and savings formation, so disruptions could dampen domestic demand. 

This combination—rising costs colliding with weakening income growth—is the textbook definition of stagflationary pressure. 

For a banking system heavily exposed to consumer lending, mortgages, and corporate leverage, such an environment gradually erodes balance-sheet quality. 

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface 

The real story, however, lies beneath the macro headlines—in the financial plumbing of the banking system. 

Recent balance-sheet data from the Bangko Sentral ng Pilipinas reveal a system quietly tightening. 

IIIA. Bank Liquidity Buffers Are Thinning 

Key indicators already show signs of intensifying pressure.

Figure 5

Both cash-to-deposit and liquid-assets-to-deposit ratios have been trending downward, indicating that banks are operating with thinner liquidity buffers relative to their funding base. (Figure 5, topmost pane) 

At the same time, although the non-performing loan (NPL) ratio ticked higher in January from its May 2025 lows, the percentage metric masks a deeper Wile E. Coyote velocity dynamic. 

While the NPL ratio appears relatively contained, gross NPLs measured in pesos have actually climbed to fresh record highs in January. The expansion of bank credit—through the denominator effect—suppresses the ratio even as the absolute level of distressed loans continues to rise. (Figure 5, middle graph) 

To recall, aside from this denominator effect, the suppression of the NPL ratio can also arise from a combination of factors:

• loan restructurings
• charge-offs
• regulatory relief measures
• reclassification effects
• inaccurate reporting 

Viewed from the peso lens, NPLs reveal mounting distress within the system. Viewed from the ratio perspective, the deterioration appears modest. Yet the direction of travel remains critical. Historically, NPL ratios lag economic stress rather than lead it. 

If GDP weakens further while employment softens and energy prices help erode the purchasing power of the peso, this deterioration could accelerate. 

The dynamic resembles what Hyman Minsky described as the transition from hedge finance toward speculative finance. During periods of easy liquidity, borrowers accumulate obligations under the assumption that refinancing will remain available. But when shocks—such as an oil spike, fiscal strain, or currency depreciation—raise costs while eroding incomes, balance sheets that once appeared stable can quickly become fragile. 

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling 

The Bangko Sentral ng Pilipinas Depository Corporations Survey (DCS) provides a system-wide view of balance sheets across the banking sector. Recent data suggest that the traditional transmission mechanism between liquidity and credit creation is beginning to weaken. 

IIIB.1 Liquidity Detaches From Credit 

Historically, money supply growth in the Philippines has closely tracked bank lending. In a bank-dominated financial system, loans create deposits, and deposit expansion feeds directly into the growth of broad money. 

Recent data, however, show that this relationship has broken down. 

Universal and commercial bank loan growth has been rolling over since mid-2025 even as broad money (M3) continues to expand. The divergence suggests that liquidity creation is increasingly being driven by balance-sheet channels other than private credit expansion. (Figure 5, lowest visual) 

In other words, liquidity is still growing—but the mechanism generating that liquidity is shifting.

IIIB.2 External Liquidity Replaces Domestic Credit 

The shift becomes clearer when examining the external side of the banking system’s balance sheet.

Figure 6

Even as domestic lending slows (claims on Private sector), net foreign assets within the financial system have expanded. Higher gold prices, reserve valuation effects, and external borrowing have all contributed to rising foreign asset positions. Net foreign assets were up 5.9% and 10.2% in the first two months of 2026, while claims on the private sector posted hefty gains of 10.7% and 10.6% respectively. (Figure 6, topmost window) 

These external balance-sheet gains inject liquidity into the domestic financial system despite slowing private credit growth. 

The implication is that a growing share of monetary expansion is being supported by external balance-sheet dynamics rather than internal credit creation. 

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

Another structural shift appears in the composition of bank assets. 

As lending to the private sector slows, banks’ claims on the national government (NCoCG) continue to expand. This suggests that sovereign borrowing is increasingly absorbing liquidity within the financial system. (Figure 6 middle chart) 

When government borrowing begins to dominate balance-sheet expansion, it crucially reflects a crowding-out mechanism, in which the state becomes the primary absorber of financial resources while private credit growth weakens. 

This dynamic creates a paradoxical condition: liquidity remains abundant within the monetary system, yet the flow of credit into productive economic activity begins to substantially slow. 

From the perspective of Austrian capital theory, this shift reflects the kind of structural distortion that prolonged liquidity accommodation can generate. As the late Austrian economist Roger W. Garrison argued, credit expansions can redirect financial resources toward sectors or activities that appear viable only under persistently easy financial conditions. When lending momentum slows or funding conditions tighten, the underlying structure of investment begins to reveal its fragilities. 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission 

If the Depository Corporations Survey reveals the evolving structure of bank balance sheets, the Monetary Authority Survey (MAS) shows how the central bank’s own balance sheet is shaping liquidity conditions. 

Recent MAS data point to a subtle but important change in the character of monetary expansion. 

One revealing indicator is the divergence between currency in circulation and broad money growth. 

Currency issuance has slowed even as M3 continues to expand. Normally, expanding deposits eventually translate into greater currency usage as money circulates through the broader economy. 

When currency growth decelerates while deposits continue rising, it suggests that liquidity is remaining within the bank dominated financial system rather than circulating through real economic activity. 

This pattern suggests a financial environment in which monetary liquidity expands while bank balance-sheet liquidity tightens. 

Sovereign borrowing increasingly absorbs bank asset capacity while external balance-sheet dynamics inflate monetary aggregates. 

The result is a divergence: liquidity appears abundant in the monetary statistics even as credit transmission to the private economy weakens. 

IIID. A Financial System Becoming Balance-Sheet Driven 

Taken together, the signals from the DCS and MAS point to a financial system undergoing a structural transition. 

Bank lending growth is slowing. Domestic credit expansion is weakening. Currency circulation is decelerating. 

Yet monetary liquidity continues to expand—supported by external asset accumulation, sovereign borrowing, and balance-sheet adjustments within the financial system. 

In other words, system liquidity is still growing, but it is increasingly detached from private credit creation and real economic activity. 

Importantly, these shifts were already visible in the data before the oil shock emerged. The system entered the current energy shock with underlying financial imbalances already developing beneath the surface. 

The oil shock therefore did not create the stress now appearing across markets. It merely accelerated and exposed the structural strains that had already begun to form within the country’s financial architecture. 

IV. The Yield Curve’s Hidden Message 

Finally, the government bond market is beginning to reflect these tensions. 

Figure 7 

Since the outbreak of the Middle East conflict, the Philippine yield curve has shifted toward a bearish flattening, led by a selloff in the belly of the curve—particularly the 5- to 10-year segment. (Figure 7, upper chart) 

Even the front end, which typically reflects expectations about future monetary policy, has begun to rise. (Figure 7, lower graph) 

The increase in short-term Treasury bill yields suggests that markets are beginning to reassess expectations for monetary easing, reflecting growing concern that inflationary pressures and fiscal risks may constrain policy flexibility. 

Yet, such movements in the yield curve often emerge when markets begin pricing a combination of risks:

• inflation pressures
• weakening economic growth
• rising fiscal borrowing needs
• duration risk

Recent policy responses reinforce these concerns. Authorities have begun rolling out subsidies for tricycle and jeepney drivers, and the fisherfolks, including a proposed Php 3.5-billion program to subsidize commuters and partially finance the fuel costs of public utility vehicles (PUVs). 

In the world of “free-lunch politics,” such subsidies risk widening fiscal deficits. The Treasury curve increasingly appears to be pricing the possibility that oil-shock relief measures could translate into larger borrowing requirements and once again inflationary pressures. 

In other words, the curve is not signaling healthy economic expansion. 

Instead, it points toward tightening financial conditions and rising interest-rate pressures. Most importantly, it reflects financial stress emerging under inflation constraints. 

For banks, this shift in the yield curve is not merely a market signal. It directly affects funding costs, asset valuations, and the profitability of maturity transformation—the core business model of the banking system. 

V. Oil Shock as the Catalyst for a Banking System Test 

Taken individually, each of these developments might appear manageable. 

Taken together, however, they form a reinforcing loop. 

Higher oil prices worsen the trade deficit and weaken the peso—an outcome that organically reflects the widening savings-investment gap in the domestic economy. 

A weaker peso raises the cost of imports and intensifies inflationary pressures. 

Rising prices compress real household incomes, while employment weakens as economic growth slows. 

The deterioration of household balance sheets eventually translates into rising loan stress within the banking system. 

As risks increase, banks respond by tightening lending standards and slowing credit growth. The resulting credit contraction then further dampens economic activity, reinforcing the cycle. 

This is the mechanism through which macroeconomic shocks propagate through financial systems. 

VI. The Policy Dilemma Ahead 

The challenge for policymakers is that the traditional policy response may no longer be readily available. 

If inflation remains elevated due to oil prices and currency pressures, the central bank cannot easily deploy aggressive monetary easing. 

Yet if economic growth slows and credit conditions tighten, the usual policy reflex is to rely on easy-money support from the banking system.

If recession risks become imminent, the increasingly crowded fiscal space not only limits the scope for government intervention but may itself amplify financial fragility. 

This is the classic emerging-market policy trap: inflation constrains monetary easing just as financial fragility begins to demand it. 

The dilemma is not purely economic but also institutional. Public choice economists such as James M. Buchanan emphasized that policymakers face incentives to favor short-term stabilization over long-term adjustment. 

Over time, as Mancur Olson observed, institutional arrangements tend to accumulate rigidities that make meaningful reform increasingly difficult.

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility 

The current oil shock is not creating the Philippines’ financial vulnerabilities. It is revealing them. 

Years of debt expansion, fiscal deficits, and reliance on liquidity support have already stretched balance sheets across households, corporations, banks, and even the government itself. 

The war-driven surge in oil prices simply adds another layer of stress to an already fragile system. 

If energy prices remain elevated and the peso continues weakening, the Philippine banking sector may soon face a test not seen since the pandemic period—this time under far less accommodating global financial conditions. 

The coming months will determine whether the financial system can absorb the shock. 

Or whether the oil spike ultimately becomes the catalyst that exposes deeper structural strains within the country’s financial architecture. 

Caveat Emptor.