Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War?

Devaluation is not a tool for exports. It is a tool for cronyism and always ends with the demise of the currency as a valuable reserve—Daniel Lacalle

In this issue 

Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War?

I. BSP Denies Currency Manipulation Amid Trade Talks

II The Mar-a-Lago Framework: Dollar Devaluation as Trade Strategy

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

IV. Market Signals Point to Implicit Bilateral Deals

V. Taiwan’s Hedging Frenzy: Collateral Damage of FX Realignment?

VI Gross International Reserves Tell a Different Story

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

VIII. Yield Spreads and Market Disruptions Signal Intervention

IX. Conclusion: The Hidden Costs of Currency Leverage; Intertemporal Risks and Economic Feedback Loops 

Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War? 

How the BSP's currency interventions may be hiding an implicit trade deal with Washington

I. BSP Denies Currency Manipulation Amid Trade Talks 

From a syndicated Reuters news, the Interaksyon reported May 20: "The Philippine central bank said there is no indication that its management of the peso’s exchange rate is part of trade negotiations with the U.S. government, as it signalled a preference for non-interest rate tools to manage capital inflows. The Bangko Sentral ng Pilipinas said while it expected to further ease monetary policy because of a favourable inflation outlook, it favoured a more nuanced approach to managing liquidity and exchange rate volatility. “The BSP does not normally respond to capital flow surges or outflows, or even volatility, using policy interest rate action,” the BSP said in an emailed response to questions from Reuters. Philippine officials met U.S. authorities on May 2 to discuss trade. Although not directly involved in the talks, the BSP said there was no indication foreign exchange considerations were explicitly part of the negotiations. The Philippines has not been spared from President Trump’s tariffs, although it faces a comparatively modest 17% tariff, lower than regional neighbours Malaysia, Thailand, Indonesia, and Vietnam. “The BSP adopts a pragmatic approach in managing capital flow volatility, combining FX interventions when necessary, the strategic use of the country’s foreign exchange reserve buffer, and macroprudential measures,” it said." (bold added)

II The Mar-a-Lago Framework: Dollar Devaluation as Trade Strategy 

Though the Mar-a-Lago Accord, coined by analysts like Zoltan Pozsar and popularized by Stephen Miran, is a speculative framework, it draws inspiration from the 1985 Plaza Accord, where G5 nations coordinated to depreciate the U.S. dollar to boost American exports. Stephen Miran, now Chairman of the White House Council of Economic Advisers, published a paper in November 2024 titled ‘A User’s Guide to Restructuring the Global Trading System.’ 

It argues that the U.S. dollar’s persistent overvaluation harms American manufacturing by making exports less competitive and imports cheaper, contributing to a $1.2 trillion trade deficit in 2024.

To address this, Miran proposed devaluing the dollar by encouraging foreign central banks to sell dollar assets or adjust monetary policies, while using tariffs as a ‘stick’ to pressure trading partners into currency adjustments or trade concessions.

While dedollarization—reducing reliance on the dollar in global trade and reserves—is often cited as the cause of recent dollar weakness, this may apply to countries with geopolitical tensions with the U.S., such as China or Russia or other members of the BRICs.

However, it doesn’t explain the currency strength among staunch U.S. allies like the Philippines, Japan, and South Korea, suggesting a different motive: implicit negotiations with the Trump administration.

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

Figure 1 

Year to June 13, 2025, the USD dropped against 8 of 10 Bloomberg-quoted Asian currencies, led by USDTWD (Taiwan dollar) -9.9%, USDKRW (Korean won) -7.8%, and USDJPY (Japanese yen) -8.35%. (Figure 1, topmost and middle charts) 

These countries, staunch U.S. allies that host American military bases, are the most likely to accommodate Washington’s demands. 

In ASEAN, major currencies appreciated more modestly: USDMYR (Malaysian ringgit) fell 5.05%, USDTHB (Thai baht) 5.49%, and USDPHP (Philippine peso) 2.8%. 

In contrast, USDIDR (Indonesian rupiah) rose 1.06%, indicating rupiah weakening—likely due to Indonesia's neutral stance, persistent fiscal concerns, and weaker ties to the U.S.

IV. Market Signals Point to Implicit Bilateral Deals 

On May 23, MUFG commented: "Markets have seemingly perceived that President Trump is looking for a weaker US dollar versus several Asian currencies as part of bilateral trade negotiations. Bloomberg News recently reported that the Taiwanese authorities had allowed the TWD to appreciate sharply earlier this month. The deputy governor of CBC has said that this strategic move is to allow market expectations for TWD gains to play out. But this is apparently at odds with the Taiwan central bank’s past preference to intervene in the FX market to smooth out volatility. The Korean won has also advanced sharply on the news that the US-South Korea finished the second technical discussions on 22 May." (bold added) (Figure 1, lowest graph) 

This MUFG insight—"A weaker US dollar versus several Asian currencies as part of bilateral trade negotiations"—suggests an implicit bilateral Mar-a-Lago deal.

V. Taiwan’s Hedging Frenzy: Collateral Damage of FX Realignment? 

Notably, Taiwan’s insurers recently suffered massive losses during the USD selloff and may have even contributed to it. Taiwan’s Financial Supervisory Commission (FSC) summoned insurers for reportedly “rushing to hedge their US bond holdings.” This could reflect unintended effects of TWD appreciation, potentially tied to an implicit Mar-a-Lago deal. 

In a nutshell, it’s likely no coincidence that currency appreciation aligns with the U.S.’s closest allies, suggesting implicit bilateral Mar-a-Lago deals driven by Trump’s tariff leverage, despite official denials. 

VI Gross International Reserves Tell a Different Story 

"Never believe anything in politics until it is officially denied"—Ottoman Bismark 

Taiwan’s central bank’s denial of involvement closely mirrors that of the Bangko Sentral ng Pilipinas (BSP). 

The BSP has washed its hands from using the peso as a tool for negotiation, despite the Philippines status as a client state in ASEAN, bound by the 1951 Mutual Defense Treaty and hosting U.S. military bases. 

Given the Mar-a-Lago framework of coupling dollar devaluation with tariffs, trade negotiations with the U.S. would likely involve the BSP, making its denial implausible. 

While no official agreement exists, the BSP noted it could use a combination of “FX interventions when necessary” and “the strategic use of the country’s foreign exchange reserve buffer” for capital flows management. 

This rhetoric suggests using the Philippine peso as strategic leverage for trade negotiations, aligning with the Mar-a-Lago goal of weakening the dollar to reduce the U.S.$1.2 trillion trade deficit, including the Philippines’ $5 billion surplus from $14.2 billion in exports.

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

Figure 2 

Consider the evidence: When the USDPHP fell in 2012 and 2018, the increase BSP’s Gross International Reserves (GIR) accelerated, evidenced by aggregated monthly inflows. 

As a side note, May’s GIR saw a marginal increase, supported ironically by gold, which has served as an anchor. (Figure 2, topmost and middle images) 

Recall that last February, the BSP dismissed gold’s role, citing the "dead asset" logic: Gold prices can be volatile, earn little interest, and incur storage costs, so central banks prefer not to hold excessive amounts." Divine justice? 

Yet ironically, unlike past trends, the current USDPHP decline has led to a reduction in the GIR. (Figure 2, lowest visual) 

The BSP’s template, repeated in January, March, and April, states: "The month-on-month decrease in the GIR level reflected mainly the (1) national government’s (NG) drawdowns on its foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP) to meet its external debt obligations and pay for its various expenditures, and (2) BSP’s net foreign exchange operations." 

The USDPHP remains far from the BSP’s ‘Maginot Line’ of Php 59—the upper band of its informal ‘soft-peg’ range—so why is its GIR eroding? 

While part of the decline may be due to ‘revaluation effects’ from rising long-term U.S. Treasury yields (falling bond prices) and a softer dollar, this insufficiently explains the GIR’s decline amid an appreciating peso, contrary to historical patterns.

Figure 3

BSP data shows its net foreign assets contracted year-on-year in April 2025, the first decline since July 2023. (Figure 3, topmost diagram) 

This partly reflects changes in the FX assets of Other Deposit Corporations (ODCs), but the primary driver has been the BSP’s dollar-denominated assets. (Figure 3, second to the highest pane) 

Either we are seeing 'revaluation effects' from a GIR heavily weighted in USD assets—given that the BSP was the largest central bank gold seller in 2024, reducing its gold holdings to bolster reserves—or the BSP has been offloading some of its FX holdings to weaken the USD, thereby supporting the peso’s rise. It could be both, distinguished by scale.

VIII. Yield Spreads and Market Disruptions Signal Intervention 

The spread between 10-year Philippine and U.S. Treasury yields has drifted to its widest since 2019, when BVAL rates replaced PDST in October 2018 as the benchmark for Philippine bonds. (Figure 3, second to the lowest and lowest graphs) 

Historically, this was linked to deeper USDPHP declines, but since the BSP adopted its ‘soft-peg’ regime in 2022, its interventions have significantly reshaped this correlation—altering market signals and shifting currency allocations within the financial system

Figure 4

Weak organic FX revenues—contracting FDIs (-45.24% YoY Jan-Mar 2025), tourism (-0.82% Jan-Apr, including overseas Filipino visitors), March 2025 remittances at a 9-month low, and volatile portfolio flows ($923 million Jan-Apr)—don’t support the peso’s strength, except for services exports (+7.2% Q1 GDP). (Figure 4) 

Insufficient FX flows explain the surge in external debt, as the Philippines borrows heavily to bridge the gap, with external debt increasing to support trade, fiscal needs, and the defense of the USDPHP soft peg.

Figure 5 

Philippine external debt surged by a staggering 14% in Q1 2025, driven by a 17.4% rise in public FX debt, which now accounts for approximately 59% of the total! 

The BSP calls a sustained spike in FX debt 'manageable'—color us amazed!

IX. Conclusion: The Hidden Costs of Currency Leverage; Intertemporal Risks and Economic Feedback Loops 

These factors strengthen the case that the BSP is using the peso as leverage for trade negotiations—an implicit bilateral Mar-a-Lago deal. 

These interventions have intertemporal effects—or unintended consequences from pursuing short-term goals—that will likely surface over time. 

The USD’s decline will likely accelerate FX-denominated borrowings, becoming more evident once the peso weakens—similar to the 2018 and 2022 episodes—amplifying currency, interest rate, and other risks through mismatches that could exacerbate market disruptions. 

This poses risks of dislocations in sectors reliant on merchandise trade, remittances, or FX or USD fund flows, potentially triggering feedback loops that could negatively impact the broader economy or lead to economic and financial instability. 

And with escalating risks of a fiscal shock—one that could trigger and amplify unforeseen ramifications—that would translate into a perfect storm, wouldn’t it? 

Q1 2025 PSEi 30 Performance: Deepening Debt-Driven Gains Amid Slowing Economic Momentum

 

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations.  Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings-Dr. Kurt Richebacher 

In this issue:

Q1 2025 PSEi 30 Performance: Deepening Debt-Driven Gains Amid Slowing Economic Momentum

I. An Extension of 2024's Fiscal-Monetary Interplay

II. Debt-Led Growth: Fragile Foundations

III. Revenue Growth: Record Highs, Diminishing Returns

IV. Consumer Sector Strains: Retail and Real Estate Under Pressure

V. Net Income Surge: A Paradox of Profitability

VI. Sectoral Performance: Diverging Trends

VII. Top Movers: Individual Firm Highlights

VIII. A Fragile Foundation: The Risks of Fiscal and Financial Leverage

IX. Transparency and Accuracy Concerns

Q1 2025 PSEi 30 Performance: Deepening Debt-Driven Gains Amid Slowing Economic Momentum

Debt-fueled profits mask deeper signs of strain across retail, real estate, and consumer sectors—even as policy easing and fiscal expansion continue.

I. An Extension of 2024's Fiscal-Monetary Interplay 

The PSEi 30’s Q1 2025 performance is largely a continuation of the trends established throughout 2024 and the past decade. 

Fundamentally, it reflects the model of "trickle-down" economic development, underpinned by Keynesian debt-financed spending. This model is anchored primarily on the BSP’s policy of "financial repression"—or sustained easy money—combined with fiscal stabilizers. It has manifested through the persistent "twin deficits," driven by a record-high "savings-investment gap," and rests on the “build and they will come” dogma. 

Q1 2025 also marks the initial impact of the BSP’s first phase of monetary easing, with Q2 expected to reflect the effects of the second round of policy rate and reserve requirement (RRR) cuts. 

At the same time, the all-time high Q1 fiscal deficit—relative to previous first quarters—was clearly reflected in the PSEi 30’s performance. 

Nota Bene:

PSEi 30 data contains redundancies, as consolidated reporting includes both parent firms and their subsidiaries.

Chart Notes:

1A: Based on current index members; may include revisions to past data

1B: Historical comparison; includes only members present during each respective period; based on unaudited releases

 II. Debt-Led Growth: Fragile Foundations

Figure 1

In Q1 2025, non-financial debt among PSEi 30 firms surged by 7.6% to a record Php 5.87 trillion, with a net increase of Php 413 billion, marking the third-highest quarterly rise since 2020. (Figure 1, upper window)         

In context, this debt level accounted for about 17.12% of total financial resources (bank and financial assets), up from 16.92% in 2024, reflecting increased leverage in the financial system 

In addition, bills payable for the top three PSEi 30 banks soared by 117.5%, rising from Php 393 billion to Php 854 billion, a net increase of Php 461 billion, excluding bonds payable. 

This dramatic increase in the bank’s short-term borrowing likely stems from a sharp decline in the banking system’s liquidity metrics—specifically, the cash and due-from-banks-to-deposits ratio and the liquid assets-to-deposits ratio. 

III. Revenue Growth: Record Highs, Diminishing Returns 

Gross revenues for the PSEi 30 rose by 3.92% to a record Php 1.78 trillion in Q1 2025. However, the net revenue increase of Php 67 billion was the smallest in the past four years, signaling a clear deceleration in growth momentum. (Figure 1, lower image)

Figure 2

This revenue softness partly reflected disinflationary trends, as the Consumer Price Index (CPI) fell to 2.3%—marking its third consecutive quarterly decline. (Figure 2, topmost chart) 

This occurred despite the economy operating near full employment, with the average unemployment rate at 4%, all-time high Q1 fiscal deficit, and amid record levels of bank credit growth, particularly in consumer lending. (Figure 2, middle graph) 

Nonetheless, the validity of the near-full employment narrative appears questionable. Our estimates suggest that approximately 32% of the workforce remains 'functionally illiterate,' raising concerns about the accuracy of PSA labor market data. 

Yet, the paradox is telling: even with aggressive fiscal stimulus and sustained easy money policies, economic returns appear to be diminishing. 

The PSEi 30’s revenue slowdown closely mirrored real GDP growth of 5.4% in Q1 2025, reinforcing the broader downtrend. (Figure 2, lowest diagram) 

Nevertheless, the PSEi 30 revenues accounted for 27% of nominal GDP in Q1 2025, underscoring their substantial footprint in the Philippine economy. Broadening the scope of PSE-listed firms in national accounts would likely magnify this contribution—while simultaneously highlighting the risks posed by mounting economic and market concentration and the fragile underpinnings of "trickle-down" economic development. 

IV. Consumer Sector Strains: Retail and Real Estate Under Pressure

Figure 3

Consumer sector stress was evident in the performance of PSE-listed firms. While retail nominal GDP grew by 7.9% and real consumer GDP by 4.9%, Q1 2025 sales revenue growth for the six largest non-construction listed retail chains—SM Retail, Puregold, SSI Group, Robinsons Retail, Philippine Seven, and Metro Retail Group—slowed to 6.8%, down from 8% in Q4 2024. This deceleration occurred despite aggressive supply-side expansion, underscoring deteriorating growth dynamics. (Figure 3, upper pane) 

Since peaking in 2022, both statistical (GDP) and real indicators (sales) have undergone significant depreciation. Downstream real estate consumer publicly listed retail chains, Wilcon Depot (WLCON) and AllHome (HOME), continue to grapple with substantial challenges, as rising vacancies further deepen the ongoing sales recession. (Figure 3, lower image) 

For example, WLCON reported a 2% quarter-on-quarter increase in store count, but only a 1.2% increase in sales YoY—highlighting excess capacity amid softening demand.

Figure 4

The food services sector also showed signs of strain, despite posting 10.3% revenue growth in Q1 2025—outpacing both nominal and real GDP. (Figure 4, topmost visual) 

Jollibee’s domestic operations, which accounted for 80% of total group sales, led the sector with a 14% gain. 

In contrast, McDonald’s reported an 11.5% sales contraction despite its 'aggressive store expansion' strategy, which includes plans to open 65 new outlets in 2025. This disparity underscores uneven, yet broadly weakening, performance across major retail chains. (Figure 4, middle chart) 

Even electricity consumption has recently deteriorated. Meralco’s electricity consumption growth slowed to 1.5% (in GWh), diverging from historical GDP correlations. This downturn signals weakening underlying demand, despite near-full employment and record-high bank credit expansion. (Figure 4, lowest graph) 

V. Net Income Surge: A Paradox of Profitability

Figure 5

Despite revenue challenges, the PSEi 30’s net income amazingly surged by 16.02% to a record Php 290.6 billion in Q1 2025, with an absolute increase of Php 40.12 billion, the second-highest since 2020. (Figure 5, topmost diagram)

This was driven by a significant increase in net income margin, which reached 16.3%, the highest since 2020, possibly due to asset sales (e.g., SMC’s divestitures). (Figure 5, middle window)

Excluding SMC’s asset sales, PSEi 30’s net income would have stood at Php 269.3 billion—reflecting only a 7.6% increase. This equates to a net profit rise of Php 19.12 billion, rather than the reported Php 40.12 billion

The record Q1 fiscal deficit likely bolstered incomes, both directly through government contracts (e.g., infrastructure projects) and indirectly via increased consumer spending. However, this came at the cost of record public debt and systemic leverage, which reached Php 30.7 trillion. Public debt hit an all-time high of Php 16.683 trillion. (Figure 5, lowest image)

The PSEi 30’s debt-to-net income ratio revealed that Php 1.42 in net debt additions was required for every peso of profit generated. In terms of absolute gains, Php 10.3 in new debt supported each peso of profit increase, highlighting deepening debt dependency.

 

Figure 6 

Paradoxically, despite record borrowing and improved net income, net cash reserves fell to 2022 levels, raising more concerns about systemic liquidity. (Figure 6, upper chart)

VI. Sectoral Performance: Diverging Trends 

By sector:  (Figure 6, lower table) 

Debt: The industrial sector recorded the largest percentage increase at 48.9%, but holding companies led in absolute peso gains Php 165.644 billon, followed by industrials Php 151.4 billion. 

Revenues: Banks achieved the highest percentage revenue growth at 9.8%, but industrials led in nominal terms with Php 17 billion in gains. 

Net Income: Holding and property sectors posted the largest percentage increases at 31% and 7.6%, respectively, with holding firms leading in peso terms Php 33.8 billion. 

Cash: The services sector saw the largest increases in both percentage (30.9%) and peso terms (Php 56 billion). 

VII. Top Movers: Individual Firm Highlights

Figure 7

By firm: (Figure 7, upper table) 

Debt: Ayala Corp, San Miguel Corporation (SMC), and Aboitiz Equity Ventures (AEV) recorded the largest peso increases at Php 74 billion, Php 70 billion, and Php 62 billion, respectively. LT Group (LTG) showed a substantial reduction of Php 24 billion. 

Interestingly, SMC reported a reduction in total debt—from Q4 2024’s record Php 1.56 TRILLION to Php 1.511 TRILLION in Q1 2025—despite substantial capital and operating requirements. This decline coincided with a surge in income, primarily driven by Php 21 billion in energy asset sales (San Miguel Global Power Holding LNG Batangas facility). Even excluding one-off gains, core profits rose by 31% to Php 19 billion. The company also strengthened its cash position, with cash reserves increasing by Php 57 billion year-on-year. How did this happen? (Figure 7, lower graph) 

Revenue: GT Capital (GTCAP) and Meralco posted the largest revenue increases at Php 15.6 billion and Php 9 billion, while SMC recorded the largest decrease at Php 31.8 billion. 

Net Income: SMC led with a Php 34 billion increase, driven by asset sales, while JG Summit (JGS) reported the largest decline at Php 7.2 billion. 

Cash: ICTSI and SMC posted the largest cash expansions at Php 79.9 billion and Php 57.6billion, while LTG (due to debt repayment) and AEV had the largest reductions at Php 38.2 and 15.015 billion 

VIII. A Fragile Foundation: The Risks of Fiscal and Financial Leverage 

Consider the potential impact on the PSEi 30, the broader PSE, and GDP when: 

-Bond vigilantes demand fiscal prudence, pushing interest rates higher

-Heavily leveraged consumer adopt austerity measures.

-Malinvestments from "build and they will come" industries, such as over saturation in real estate (26% residential condominium and office condominium vacancy rates and 22% per Colliers Philippines), and trade sectors, could lead to rising unemployment. 

These risks, compounded by diminishing stimulus effectiveness, threaten the sustainability of PSEi 30 performance and GDP growth. 

For instance, SMC’s business model has become increasingly reliant on recycling its borrowings or asset sales, making it wholly dependent on the sustainability of cheap money to refinance its rapidly growing debt. Neo-Keynesian economist Hyman Minsky famously characterized this as 'Ponzi finance.' (Minsky,1992) 

In essence, the structural risks are real—and growing more visible in each earnings season. 

IX. Transparency and Accuracy Concerns 

As previously stated: 

"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." (Prudent Investor, May 2025) 

These concerns underscore persistent governance challenges—particularly if elite-owned firms are engaged in systematically underreporting liabilities and overstating revenues or profits. Such practices not only contribute to the distortion of market signals but also foster moral hazard, eventually eroding investor confidence and undermining regulatory integrity. 

___ 

References 

Hyman P. Minsky, The Financial Instability Hypothesis* The Jerome Levy Economics Institute of Bard College May 1992 

Prudent Investor, The PSEi 30 in 2024: Debt-Fueled Expansion Amid Fiscal and Monetary Shifts, Substack May 25, 2025

 

 

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