Why the Philippine Peso's Strength Masks Underlying Vulnerabilities

 

If the governments devalue the currency in order to betray all creditors, you politely call this procedure 'inflation'--George Bernard Shaw 

In this issue

Why the Philippine Peso's Strength Masks Underlying Vulnerabilities

I. Philippine Peso in the Face of a Weak Dollar

II. Is the Peso’s Strength Rooted in Fundamentals? Portfolio Flows: A Mixed Picture

III. Remittances: Diminishing Returns

IV. Tourism: Geopolitical Headwinds

V. Trade Data: Structural Deficiencies Revealed

VI. Balance of Payments and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)

VII. BSP’s Tightening Grip on FX Markets and the Illusion of Stability

VIII. The Speculative Role of the BSP: Other Reserve Assets

IX. Rising External Debt: A Ticking Time Bomb

X. Conclusion: Transitory Strength, Structural Fragility 

Why the Philippine Peso's Strength Masks Underlying Vulnerabilities 

A strong Philippine peso hides the cracks of FX debt, deficits, and interventions.

I. Philippine Peso in the Face of a Weak Dollar 

Figure 1

Surprisingly, the Philippine peso has outperformed its regional peers. Year-to-date, the USD-Philippine peso USDPHP has declined by 2.73% as of April 25. (Figure 1, upper window) 

Despite a generally weak dollar environment, the greenback has risen against some ASEAN currencies: it has appreciated by 4.32% against the Indonesian rupiah (IDR) according to Bloomberg data, and by 2.2% against the Vietnamese dong (VND) based on TradingEconomics data, year-to-date. 

The USDPHP’s behavior has largely mirrored the oscillations of the USD-euro $USDEUR pair and the Dollar Index $DXY, both of which have declined by -9.5% and -9% YTD, respectively. The euro commands the largest weight in the DXY basket at 57.6%, amplifying its influence over the index's performance. (Figure 1, lower image) 

II. Is the Peso’s Strength Rooted in Fundamentals? Portfolio Flows: A Mixed Picture  

Figure 2

Foreign portfolio flows have been volatile. 

The first two months of 2025 recorded a modest net inflow of USD 176.6 million, following significant outflows of USD 283.7 million in January and inflows of USD 460.34 million in February. These inflows were mainly directed towards government securities (USD 366 million), while the Philippine Stock Exchange (PSE) suffered USD 189 million in outflows. (Figure 2 topmost graph) 

In 2024, Philippine capital markets saw foreign portfolio inflows of USD 2.1 billion—the largest since 2013—suggesting a temporary vote of confidence, albeit in a risk-on environment favoring emerging markets more broadly. 

Meanwhile, the Bangko Sentral ng Pilipinas (BSP) reported that foreign direct investment (FDI) flows fell 20% year-on-year to USD 731 million in January 2025 from USD 914 million the year prior. (Figure 2, middle chart) 

Still, 71% of January’s FDI consisted of debt inflows, rather than equity investments. 

Ironically, despite the administration's aggressive international junkets (2022-2024) aimed at wooing investors through geopolitical alliances, these efforts have borne little fruit. 

What happened? 

As previously noted, an overvalued peso—maintained by a de facto USDPHP soft peg—along with high "hurdle rates" stemming from bureaucratic red tape and regulatory barriers, and the implicit consequences of "trickle-down" easy money policies benefiting the government and their elites (i.e., crony capitalism), have collectively undermined Philippine competitiveness. 

III. Remittances: Diminishing Returns 

Overseas Filipino Worker (OFW) remittance flows continue to grow, but at a marginal and slowing pace. Personal remittances rose 2.6% in February, with cumulative year-to-date growth at 2.7%. (Figure 2, lowest visual) 

However, the long-term trend in remittance growth has been declining since its 2013 peak—a period that coincided with the secular bottoming of the USDPHP. 

This trend reflects the diminishing marginal impact of remittances on the peso’s valuation. 

In short, remittances are becoming less material in influencing the peso’s foreign exchange rate. 

A more sustainable strategy would be to foster structurally inclusive economic growth—creating more high-quality domestic jobs and raising incomes—to reduce the country’s dependence on labor exportation and mitigate brain drain. 

Sadly, the slowdown in remittance growth does not point toward such an outcome. 

IV. Tourism: Geopolitical Headwinds

Figure 3 

The Philippine tourism sector's recovery may have stumbled. 

Foreign tourist arrivals fell by 2.42% in Q1 2025, while total arrivals—including overseas Filipino visitors—dropped by 0.51%. This was largely driven by a staggering 28.8% collapse in Chinese tourist arrivals in March and a 33.7% year-on-year plunge in Q1. This slump mirrors the escalating geopolitical tensions between the Philippines and China, particularly as Manila increasingly aligns itself with U.S. strategic interests. (Figure 3, upper diagram) 

Interestingly, American tourist arrivals also fell by 0.7% in March, although they rose by 7.9% for Q1 overall. Nonetheless, the growth in American tourists has hardly offset the sharp loss of Chinese visitors. (Figure 3, lower chart) 

In effect, a ‘war economy’ reduces the Philippines’ attractiveness as a tourism and investment destination. 

V. Trade Data: Structural Deficiencies Revealed

Figure 4

The Philippines' trade deficit narrowed by 11.44% to USD 3.16 billion in February, owing to a 1.8% contraction in imports and a muted 3.94% increase in exports, year-on-year. (Figure 4, upper graph)

While many mainstream talking heads argue that tariff liberalization will eventually benefit the Philippines, external trade figures tell a different story—one marred by structural weaknesses: high energy costs, a persistent credit financed savings-investment gap (a byproduct of trickle-down policies), the USDPHP peg, human capital limitations, economic centralization, regulatory hurdles and more.

Since 2013, total external trade (imports + exports) has grown at a CAGR of 4.84%—driven by imports growing at 5.95%, compared to exports at only 3.42%. Adjusted for currency movement (with the USDPHP CAGR at 3.01%), this yields a real export CAGR of just 0.41% versus 2.85% for imports, implying a real external trade CAGR of only 1.77%. (Figure 4 lower image)

While rising imports may superficially suggest robust consumption, a deeper question emerges: Is consumption fueled by genuine productivity gains—or by unsustainable credit expansion?

Ultimately, the data show that import-driven consumption has widened the trade deficit, and that local manufacturing remains largely uncompetitive relative to regional peers.

Against this backdrop, how realistic is it to expect that Trump's proposed tariffs will magically turn the Philippines into an export hub?

VI. Balance of Payments and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)

Figure 5

The BSP reported a Balance of Payments (BoP) deficit of USD 2 billion for March 2025, following a staggering USD 4.1 billion deficit in January—an 11-year high—and a temporary surplus of USD 3.1 billion in February. The Q1 2025 BoP deficit stood at USD 2.96 billion. (Figure 5, upper window)

The BSP attributed these outflows to "drawdowns on reserves to meet external debt obligations" and to fund foreign exchange operations—justifications previously offered for January’s record deficit.

Meanwhile, February’s surplus largely stemmed from net foreign currency deposits by the National Government, sourced from proceeds of ROP Global Bond issuances and income from BSP’s foreign investments—in other words, from external borrowings.

Notably, the BSP has admitted that the year-to-date BoP deficit mainly reflects the widening goods trade deficit. Either this conflicts with PSA trade data showing a narrowing February deficit, or it hints at a possible sharp deterioration in March's trade balance.

Regardless, the BoP reports clearly indicate heavy BSP intervention in the FX market, even though the USDPHP remains well below the 59-level psychological ceiling.

Consequently, the BSP’s gross international reserves (GIR) dropped from USD 107.4 billion in February to USD 106.7 billion in March—a USD 725 million decline. (Figure 5, lower diagram)

Importantly, much of the GIR’s support comes from the government’s external borrowings deposited with the BSP. Thus, the GIR has been padded up artificially.

Figure 6

Even more striking: gold’s record high prices have prevented a steeper GIR decline, despite the BSP selling small amounts of gold in February.  

Gold's share of GIR slipped marginally from 11.4% in February to 11.22% in March. (Figure 6, upper pane)

Had it not been for ATH (all-time high) gold prices, the GIR would have deteriorated more significantly. 

As previously explained, as with the 2020 episode, sharply falling gold inventories preceded the devaluation of the peso. (Figure 6, lower chart) 

Outside of gold, a large share of GIR now constitutes "borrowed reserves"—a growing vulnerability tied directly to the BSP’s soft peg strategy for the USDPHP. 

This suggests that the recent GIR stability could be masking underlying vulnerabilities.

VII. BSP’s Tightening Grip on FX Markets and the Illusion of Stability 

It is therefore almost amusing to encounter this news item, based on the BSP’s publication: 

Inquirer.net, April 24: "The Bangko Sentral ng Pilipinas (BSP) tightened regulations on foreign exchange (FX) derivatives involving the Philippine peso to ensure these are not used for currency speculation. Circular No. 1212, signed by Governor Eli Remolona Jr., mandates that banks authorized to transact in non-deliverable FX derivatives must ensure these are used for legitimate economic purposes." 

But who are the likely participants in FX swaps, non-deliverable forwards, and FX derivatives?

Not me. Not the general public. 

Given that PSE participation is only around 1% of the total population (as of 2023), the obvious answer is: banks and their elite clientele—the BSP’s own cartel members. 

Thus, what is the real message behind this announcement? 

First, banks and their elite clients may have been positioning against the peso, in ways inconsistent with BSP policy—prompting the BSP to tighten currency controls. 

Second, the BSP wants to show the public it is taking action, even as real risks accumulate. 

Third, something is amiss if the BSP feels compelled to impose tighter controls even with the USDPHP hovering at 56—well away from their upper band limit. 

Ultimately, who is truly engaged in currency speculation here? 

VIII. The Speculative Role of the BSP: Other Reserve Assets

Figure 7

Since 2018, the BSP has increasingly used Other Reserve Assets (ORA) to manage its GIR. (Figure 7) 

According to IMF IRFCL guidelines, ORA includes:

-Net, marked-to-market value of financial derivatives (forwards, futures, swaps, options)

-Short-term foreign currency loans

-Long-term loans to IMF trust accounts

-Other liquid foreign currency financial assets

-Repo assets 

The BSP’s ORA surged by 210.3% in February, lifting its share of GIR to 9.18%. Yet, even this rise was overshadowed by gold's role in preserving GIR totals. 

In truth, the BSP itself is a speculator—aggressively managing USDPHP levels against market forces. 

In pursuing short-term stability, it risks building imbalances that will eventually unwind with greater force. 

This has been evident in the widening BoP deficit, the rising share of "borrowed reserves," and the sustained gold sales. 

IX. Rising External Debt: A Ticking Time Bomb

Figure 8

Perhaps most revealing is this BSP announcement: 

BSP, April 25, 2025: "The Monetary Board approved USD 6.29 billion worth of proposed public sector foreign borrowings in Q1 2025, up by 118.91% from USD 2.87 billion during the same period last year." (bold mine) [figure 8, upper graph] 

Whatever the justification—whether for infrastructure, green (climate), defense, or welfare or others—debt is debt. 

Even though the BSP paid down nearly half its obligations (posting a Q1 BoP deficit of USD 2.96 billion), the residual balance should add to the swelling external debt stock. (Figure 8, lower chart) 

Recall that as of Q4 2024, government debt already accounted for 58% of total external debt. Banks and non-finance institutions are likely to add to this pile. 

Higher public debt implies higher future debt servicing costs, crowding out resources from productive investments, draining savings, increasing leverage, and deepening the Philippines’ dependence on foreign financing. 

X. Conclusion: Transitory Strength, Structural Fragility 

The Philippine peso’s strength in 2025, buoyed by a weak U.S. dollar, masks underlying vulnerabilities. Structural issues—overvalued currency, uncompetitive manufacturing, declining remittance growth, geopolitical strains, and reliance on borrowed reserves—undermine long-term stability. 

Through the USDPHP soft peg, the BSP’s interventions, while stabilizing the peso in the short term, foster imbalances that could unravel with a global tightening of monetary conditions. 

Without addressing these structural challenges through inclusive growth, deregulation, and reduced dependence on debt and remittances, the Philippines risks a rude awakening. The peso’s current resilience is less a reflection of economic strength and more a temporary reprieve, vulnerable to shifts in global financial tides. 

Nota bene: Although we discussed tourism and remittances, we did not cover business process outsourcing (BPO) and other export services in depth, largely due to limited data and the need to rely on GDP proxies. Regardless, surging debt levels are exposing widening FX liquidity vulnerabilities that services alone cannot offset. 

____

reference 

IMF INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE 2. OFFICIAL RESERVE ASSETS AND OTHER FOREIGN CURRENCY ASSETS (APPROXIMATE MARKET VALUE): SECTION I OF THE RESERVES DATA TEMPLATE, p.25 IMF.org

 

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

  

The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it– Strauss & Howe: The Fourth Turning

In this issue

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

III. Asian Currencies in the Shadow of a Strong US Dollar

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

V. The BSP’s Increasing "Borrowed Reserves"

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?"

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

While the local media is abuzz with the worsening standoff in the territorial dispute between the Philippine government and China, and the Philippine Peso nearing record levels, financial experts are oddly silent about the economic risks involved.

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

Figure 1

Mainstream experts seem more confused than ever about the state of the US dollar-Philippine peso $USDPHP. 

As the $USDPHP approaches a milepost, they appear to be sugarcoating the fragility of the Philippine peso by attributing the peso’s weakness to the divergent policy conditions between the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP). (Figure 1, topmost image)

They are actually defending the Philippine peso when they allude to the strength of the US dollar, the elevated Gross International Reserves (GIR), and other possible BSP toolkits. 

Using what seems as reverse psychology, a foreign institution even projected that the peso would "become one of Asia’s worst-performing currencies," given the BSP’s ‘dovish’ stance. (Figure 1, middle visual)

Bizarrely, they placed a marker for this: the USDPHP would "hold at 58 per dollar, although it may weaken to as low as 58.60, which would be a few centavos away from the record-low 59 it hit in 2022." 

Amazing. 

The thing is, the news was hardly a projection; it was a description of present events. 

The USDPHP signified the fourth worst currency in Asia (year-to-date), after the Japanese yen $USDJPY, South Korean won $USDKRW, and Indonesian rupiah $USDINR—as of June 21st. (Figure 1, lowest chart) 

By placing a boundary for the "worst in Asia" assumption to hold, it translates to either a positional stasis or that most Asian currencies would do better because of the so-called ‘dovish’ stance of the BSP. 

Figure 2

Ironically, the nominal yield spread between the 10-year Philippine BVAL and US Treasury bonds has been rising in favor of the former.

Operating under the belief of arbitrage opportunities, the consensus thinks that relatively higher (nominal) rates for the Philippine Treasury should favor the peso.

But this dynamic has barely been the case, as a relatively lower Philippine yield has coincided with a strong peso and vice versa from 2019 to Q1 2022. Since then, USDPHP has climbed ahead despite the spread—or the correlation broke from Q2 2022 to the present. (Figure 2, topmost diagram) 

In brief, this loose correlation does not support the popular thesis.

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

Here is what the Overton Window critically overlooks: the escalating standoff over the territorial dispute between the Philippines and the Chinese government.

Haven't you noticed? The Sino-Philippine West Philippine Sea showdown has been splashed all over mainstream media. Despite this, there is nearly ZERO attribution about it to the Philippine peso or the Philippine economy. This stark contrast underscores the disconnect between the intense diplomatic and military tensions and the lack of insights into its potential economic fallout.

That is to say, while the risks of the Philippines becoming the Ukraine of Asia grows with every confrontation, the consensus oxymoronically sees such risks as non-existent. 

Could they be talking about the Philippines? Why the complete absence of the mounting risks of war?

This seemingly incredible blindness represents either "blissful oblivion" or "willful negligence" over the possible cataclysmic risks from an outbreak of violence. 

As I recently posted on my X (formerly Twitter) account, at the onset of wars, the currencies of those involved—namely the Russian ruble $USDRUB, Ukraine’s hryvnia $USDUAH, and Israel’s new shekel $USDILS—materially fell against the US dollar. (Figure 2, lower image)

That's a blueprint for the Philippine economy that we should expect when water cannons and knives escalate into a shooting battle.

Aside from a possible plunge in the Philippine peso, depending on the scale of war, we can expect a double "deep" recession, a possible stock market crash (if it remains open), rolling brownouts—when power plants become military targets—which means disruptions in digital payments and bank ATM withdrawals, massive disruptions in the division of labor, and the BSP printing more money—which leads to stagflation!

While we earnestly pray that this does not happen, as there are other peaceful options like Vietnam’s "bamboo diplomacy," the Asian version of foreign policy neutrality, it is a risk that every Philippine resident confronts as contending parties to territorial claims remain intransigent and lean on belligerency.

Although we won’t expand further on the geopolitical dimension of the rising risks of a Sino-Philippine military conflict, it's crucial to note that the US dollar-Philippine peso exchange rate is not insulated from these rising tensions. 

My brief two cents on the Philippine government’s turnaround regarding the alleged "armed aggression" of China in an X thread. 

III. Asian Currencies in the Shadow of a Strong US Dollar 

Operating under the de facto US dollar standard, the US and its political, economic, and financial activities overseas have a distinctive impact on the world. 

In addition to the transition away from globalization and domestic politics, geopolitics is another key factor contributing to the recent increasing value of the USD. 

An abrupt rise in the US dollar is often a sign of emerging economic distress.

Figure 3 

Unlike its popular portrayal, the rising value of the USD is not an anomaly. 

Using the US dollar index $DXY as a benchmark, it has been in an uptrend since 2021, supported by a reverse head-and-shoulders pattern. More importantly, the longer-term trend shows a 9-year uptrend. (Figure 3, topmost and second to the highest graphs) 

The $DXY is composed of a weighted basket of developed economy currencies, including the European euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. 

The uptrend in the USD is evident across several ASEAN currencies, including the Indonesian rupiah $USDIDR, the Philippine peso, the Malaysian ringgit $USDMYR, and the Vietnam dong $USDVND, though it's not shown in the chart. (Figure 3, second to the lowest chart) 

In the long term, however, the USD has underperformed against the Thai baht $USDTHB and Singapore dollar $USDSGD. (Figure 3, lowest window)

Using the mainstream's logic, the Bank of Indonesia (BI) unexpectedly raised rates in April in an attempt to "anchor the rupiah". Despite this move, the $USDIDR pair carved out a milestone high last week. Was the BI's decision still "dovish"? 

The essence lies in the fact that Asian currencies exhibit asymmetric performances that are underpinned by their idiosyncratic or unique domestic conditions. 

A sweeping generalization of a strong USD represents a fallacy of composition.

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

Figure 4

More intriguing is the widespread conviction that the country's foreign exchange reserves (GIR) serve as a talisman against the rising US dollar, which appears to be more of a manifestation of faith or defending piety than an analysis based on economic theory and data.

If this belief were valid, then $USDPHP pair would have underperformed. Alternatively, there wouldn’t have been an uptrend in $USDPHP if the GIR had functioned as advertised. (Figure 4, topmost image)

Instead, we see that the GIR fell upon its drawdown by the BSP to defend the peso when the $USDPHP carved a record in 2022.

Ironically, the BSP accelerated its accumulation of GIR in 2019-2020 just at the late stage of the peso's rally.

Since then, it has been a tango for the GIR and USDPHP as both proceeded higher.

Separately, as evident from the BSP's annual balance sheet, the strength of the $USDPHP has coincided with an increasing percentage share of BSP's local currency issuance against its total liabilities. (Figure 4, middle chart)

In short, the primary driver of the USD/PHP's uptrend has been the BSP's money printing operations, not the GIR.

V. The BSP’s Increasing "Borrowed Reserves"

Furthermore, what authorities say is often taken as "gospel truth," with few questioning the numbers behind them.

Let us turn to the GIR. 

The Philippine government borrowed USD 2 billion in early May.

The BSP described the increase in its GIR for the same month as follows: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024) 

Subsequently, the BSP also disclosed that its Balance of Payments (BOP) showed a surplus during the same period: "The BOP surplus in May 2024 reflected inflows arising mainly from the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024)

See that? The BSP admitted that "borrowed reserves" has constituted a part of its GIR and BOP. Hence, the USDPHP ignored them and proceeded higher. (Figure 4, lowest graph)

Figure 5

May’s US dollar borrowings will likely add to the USD 128.7 billion of external debt, which was up by 8.32% in Q1 2024. (Figure 5, topmost graph)

External debt has soared past the BSP’s GIR of USD 104.1 billion for the same period.

Yet, as acknowledged by the BSP, part of external debt has been incorporated into the GIR.

There’s more to consider.

As the Philippines’ April GIR showed, based on IMF’s International Reserves and Foreign Currency Liquidity (IRFCL), the BSP has been selling off its gold reserves and has boosted its use of Other Reserve Assets (ORA).  The BSP’s physical gold reserves last April signified a multi-year low! (Figure 5, middle pane)

Other Reserve Assets comprise financial derivatives, short-term currency loans, repos, and other liquid assets. (IMF, IRFCL)

During the international easy money era, ORA became a feature in the GIR build-up from 2018-2020 and the rally of the peso. (Figure 5, lowest chart)

However, rising costs compelled the BSP to reduce its use in 2022. Nonetheless, the BSP returned to it last April 2024.

The thing is, "borrowed reserves" represent "US dollar shorts," which is attendant with an increasing likelihood of maturity mismatches, especially during times of stress.

Furthermore, "borrowed reserves" will need payment or refinancing. The greater the borrowings, the higher interest payments, refinancing, and principal payments, even in the assumption of steady rates, which translates to increased pressure for organic sourcing of USD revenues.

Otherwise, the economy and government would be forced to continue borrowing externally to meet growing USD liquidity needs, while increasing domestic liquidity, which would amplify the pressure for the Philippine peso to depreciate further. 

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers 

Given the entrenched "trickle-down" political-economic architecture driving the borrowing-to-spend (to prosperity) paradigm, which has engendered a record savings-investment gap, it is difficult to envision a structural shift in the current dynamics—specifically, a transition away from debt dependence—without a disorderly adjustment. 

Underpinned by Keynesian ideology, the establishment has made little or no effort to promote this essential structural change.

Rather than acknowledging the accruing tradeoffs from transitioning to a centralized political economy anchored in fiscal spending (infrastructure and the war economy) and increasing bureaucratization, the consensus continues to promote the illusion of a consumer-driven economy. 

Figure 6

A strengthening economy would swell trade deficits, given the structural shortcomings in local production, while an acceleration of the fiscal deficit would magnify the credit-financed "twin deficits." 

As evidence, April’s trade deficit expanded as imports grew by 12.6%, driven by increases in capital imports (+10.5%) and consumer goods (+15.7%). (Figure 6, top, middle and lowest chart) 

Therefore, authorities would need to rely on remittances, tourism, service exports, FDIs, foreign portfolio flows, or borrowings to cover the FX deficits.

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

Figure 7

Despite record-high nominal Overseas Filipino Workers (OFW) remittances last April, their growth rate has been slowing down primarily due to base effects.

Moreover, remittance flows are heavily influenced by global economic conditions, which may face hurdles from increasing barriers to social mobility. For instance, rising economic barriers and increased nationalism are expected to slow OFW flows.

On the other hand, vigorous tourism growth in 2023, fueled by strong domestic "revenge travel" and improved foreign arrivals, appears to have cooled down in 2024.

While FDI flows seem to be improving, the majority of these flows consist of debt. Reported FDI flows were up 23% last March and 42% in the first quarter, with debt accounting for 68% and 62% of the share, respectively.

Intercompany debt infusions do not guarantee genuine investments. Instead, they expand the USD shorts.

Additionally, taking sides in the geopolitical hegemonic contest could deter investors, making politics rather than markets the determinant of investment flows.

Meanwhile, volatile flows from foreign portfolio exposure cannot be relied upon to boost demand for the peso. This is primarily due to the structural inadequacy of the capital markets' depth (PSE and the fixed income market), which remain dominated by the elites.

Another fundamental reason is that portfolio flows are heavily dependent on global risk conditions.

Lastly, services exports appear to be the remaining hope to cushion the peso via USD revenues. So far, the industry is said to be on track to meet its growth targets this year.

However, any slowdown in this sector would exacerbate USD funding pressures.

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?" 

It is clear that the USDPHP has not been primarily driven by BSP-FED policy divergence but by real economic factors, including the BSP’s domestic monetary operations. 

If the current arrangements have resulted in thin buffers, imagine what an outbreak of military conflict would do. 

The striking divergence between a war-hawkish leaning public and the absence of discussion about its risks in the domestic financial sphere reminds me of the glaring disparity in the fact-finding report by two of former US President John F. Kennedy's foreign policy advisors, Victor Krulak and Joseph Mendenhall, on Vietnam. President Kennedy reportedly asked both, "You two did visit the same country, didn't you?" 

Paraphrasing Kennedy and alluding to local media and domestic financial experts, "You two are discussing the same country, aren't you?"

_____

References: 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion June 7, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, BOP Posts US$2.0 Billion Surplus in May 2024; End-May GIR Rises to US$105.0 Billion June 19, 2024 bsp.gov.ph

International Monetary Fund, INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE, p.25 imf.org

 

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

 By contrast, in an inflationary environment, whether it’s 10-15% (the real number in the US right now), or 100% per year as in countries like Venezuela and Zimbabwe, or the 2% the Fed advocates, currency debasement discourages people from saving. And if you don’t save, you can’t build capital. And if you don’t build capital, you can’t make investments and you can’t improve the standard of living—Doug Casey

 

In this issue

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

I. BSP Consumer Survey: Inflation Adversely Impacts the Middle- and Lower-Class

II. Consumers Magnify Balance Sheet Leverage in February; Bank Total Loans Bounced

III. Consumer Sentiment: "Stagflation Ahoy!"

IV. Part-Time Jobs! The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs!

 

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

The BSP's survey exposes the weakening of Filipino consumers from inflation, as part-time jobs constituted the 'strong' growth of the Philippine labor market last February.

 

I. BSP Survey: Inflation Adversely Impacts Middle- and Lower-Class Consumers

Figure 1

 

The latest BSP survey on consumer sentiment suggests an improvement in Q1 2024 "brought about by their expectations of: (a) additional and higher income, (b) availability of more jobs and permanent employment, and (c) additional working family members."

 

But consumers were "less optimistic for Q2 2024 and the next 12 months...in anticipation of: (a) faster increase in the prices of goods, (b) fewer available jobs, and (c) lower income."

 

The other notes included: (bold original)

 

-Consumers are less hesitant about buying big-ticket items in Q1 2024 and the next 12 months.

 

-The percentage of households with loans and savings increases in Q1 2024. The Q1 2024 survey results showed that 24.9 percent of households availed of a loan in the last 12 months, higher than the 22.9 percent recorded in Q4 2023…

 

-Consumers expect higher interest, inflation and unemployment rates, and a weaker peso in Q1 and Q2 2024.  

 

First, the BSP survey reveals that since peaking in the 1H 2022, consumer expectations have been eroding, with sporadic bounces in the interim. (Figure 1, topmost image)

 

Next, fascinatingly, the results of the BSP's survey were drawn from a distribution across the population, with the high-income group (Php 30,000 and above) comprising 38.1% of the sample size, the middle-income group (Php 10,000-29,999) comprising 38%, and the low-income group (below Php 10,000) comprising 23.8%. (Figure 1, middle diagram)

 

Does this distribution accurately represent the Philippine population, or does it skew towards favoring the views of the high-income group?

 

Third, does this also mean that, despite prospects like higher inflation, interest rates, and unemployment rates, consumers would further increase their balance sheet leverage to purchase big-ticket items?

 

In any case, 13% of the surveyed population perceived it as a 'good time to buy' a motor vehicle, higher than the 8.5% reported in Q1 2023 and 9.4% in Q4 2023.

 

But motor vehicle sales rose by 19% from 60,404 in the first two months of 2023 to 72,132 in 2024. This growth was supported by a 19% surge in Universal Commercial Bank auto loans last February.  (Table 6)

 

Since the CAMPI motor vehicle sales data includes trucks for business purposes, it doesn't distinguish the extent of consumer spending specifically on automobiles. 

Nonetheless, loan activities help reveal the extent of demonstrated preferences by consumers.

 

In any event, motor vehicle sales appear to be plagued by a bearish "rising wedge." (Figure 1, lowest chart)

 

II. Consumers Magnify Balance Sheet Leverage in February; Bank Total Loans Bounced

Figure 2

 

Banks continue to fuel consumer spending, which has been on a fiery streak.

 

Aside from auto loans, Universal Commercial Bank credit card loans remain brisk, up by 30.11% in February—representing the seventh consecutive month of over 30% growth—to a record Php 738 billion. (Figure 2, topmost chart)

 

Salary loans also reached an all-time high of Php 141.9 billion, with their growth rate increasing by 16% last February. The growth of salary loans year-over-year has closely tracked fluctuations in the Consumer Price Index (CPI). (Figure 2, middle window)

 

The key segments of consumer lending etched record highs last February. (Figure 2, lowest graph)

Figure 3

Although the production side of Universal Commercial Bank's loan portfolio accelerated last February, consumers remain the focal point for bank lending.

 

The pace of industry loan growth increased from 5.85% in January 2024 to 6.85% in February. After consumer loans amounting to Php 262.2 billion, lending to the real estate sector, totaling Php 246.4 billion, registered the largest peso growth year-over-year. (Figure 3, topmost image)

 

The upturn in the credit portfolio of the production side appears to coincide with the increased optimism of the business sector in Q2 2024, according to the BSP.

 

Nonetheless, the portion of consumer loans (excluding real estate consumer lending) continues to swell to 11.6% relative to the diminishing share of industry loans. (Figure 3, middle pane)

 

The banking system's lending bias towards consumption further solidifies the structural aspect of inflation. In other words, a minority of consumers—with access to the formal credit system—continue to amplify their leverage to bridge the gap resulting from the reduced purchasing power of their income and savings.

 

Balance sheet leveraging is likely also occurring for low-end consumers through the informal credit system.

 

As a result, consumers are gambling with their balance sheets despite the heightened risks of higher inflation, interest rates, and increased unemployment.

 

III. Consumer Sentiment: "Stagflation Ahoy!"

 

The BSP and economic authorities say that rising rates or tightening are having an effect on the economy. If so, why is systemic leverage accelerating? 

 

Total bank loans (UC, thrift, digital and rural banks plus public debt) grew by 9.94% in February to an all-time high of Php 27.413 trillion or about 113% of the Nominal GDP.  And this excludes debt from the bond markets, FDI flows, shadow banks, and informal finance. (Figure 3, lowest graph)

Figure 4

 

Coincidentally, while the number of people in the Philippines who said they'd increase their allocations to savings improved in Q1 2024 to 31.8%, it represented a bounce from Q4 2023's 28.6%—the lowest since 2019—with the lowest income segment suffering the most (Table 10). Savers are being penalized as household balance sheets expand. (Figure 4: topmost table)

 

Interestingly, consumers acted as 'analysts' in anticipation of a 'weaker peso.'

 

Or could this sentiment be attributed to a bias resulting from extensive household exposure to Overseas Filipino Workers (OFWs)? The BSP survey noted that 94.7% of households received remittances from OFWs, with OFWs in the households accounting for 6.6% of the sampled population (Tables 13 and 14).

 

The scourge of inflation has clearly been adversely impacting consumers, particularly those in the middle-and lower-income classes, even with a survey biased in favor of the higher-income class.

 

The high GDP rates conceal the redistribution effects of inflation, which favor the political class and the elites while diminishing the standard of living of the average citizenry.

 

In essence, consumers are saying "Stagflation Ahoy!"

IV. Part-Time Jobs! The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs!

 

Inquirer.net, April 11, 2024: The number of jobless Filipinos went down in February to 1.8 million, from 2.15 million in January, the Philippine Statistics Authority reported Thursday. That brought the country’s unemployment rate to 3.5 percent, lower than the 4.5 percent in the preceding month.  At the same time, 6.08 million Filipinos were underemployed in February, representing those who sought additional jobs or working hours to augment their income. That was lower than the 6.39 million underemployed persons in January.

 

The government perceives the labor force as operating similarly to the stock market, characterized by sharp volatility.

 

It appears that employers can hire and fire with diminished influence from labor regulations.

Following a record employment rate in December and its sharp drop in January, the employment rate surged from 95.5% to 96.5% in February.

 

This marked the second-steepest monthly employment gain since August 2023, aided by a bounce in the labor participation rate from 61.1% in January to 64.8% in February. (Figure 4: middle graph)

 

Alternatively, the gains stemmed from the plunge in the non-labor force population. (Figure 4: lowest image)

 

On a month-on-month basis:

 

-The population contracted by 348,000

-The labor force surged by 2.65 million

-The non-labor force population shrunk by 3 million

 

As a result, the employed population grew by 3 million.

 

According to the Philippine Statistics Authority, persons not in the labor force are 'Persons 15 years old and over who are neither employed nor unemployed according to the definitions mentioned. Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disabilities, or retired persons.'

 

By this definition, with the population slightly down, students, housewives, persons with disabilities, and retirees suddenly trooped into the labor force to secure jobs.

 

That's right. Like a switch, jobs are turned on and off based on surveys.

Figure 5

 

But there’s more.

 

While this data will serve as the foundation for GDP, it also reveals that a significant portion of February's job gains came from part-time jobs.

 

Part-time jobs jumped 25% MoM, increasing their share of the market from 27.8% in January to 32.6% in February. (Figure 5, upper chart)

 

On the other hand, full-time jobs slipped by 1.36% MoM, reducing their share of the employed population from 71.84% in January to 66.51% in February.

 

Bluntly, full-time jobs contracted by 450,000 while part-time jobs expanded by a whopping 3.19 million!

 

This distortion is evident even when looking at the PSA's spreadsheet! (Figure 5, lowest table)

 

So hidden beneath the headline is the fact that the shift from the non-labor force to the labor force was all about 'part-time' jobs!

 

Ironically, a media headline labeled this as 'better job quality.'

 

The government was not even transparent about it in their press releases.

 

Amazing.

 

It was a broad-based growth for the 'part-time' labor force.

Figure 6

The sectors with the largest labor force—agriculture (626K) and trade (1.6 million)—posted the most job gains.  (Figure 6, upper chart)

 

Other job-sensitive sectors like hotel & food services (325K), construction (231K), transportation (206K), and manufacturing (152K) also contributed to the growth in part-time jobs. (Figure 6, lower graph)

 

So, there you have it. The significance of 'part-time' jobs in contributing to consumption and GDP remains in the hands of statisticians.

 

Statistical accounts will likely depart from reality.

 

In turn, upside job volatility can turn into a downside gush.

 

That is, even the high-end consumers (in the BSP survey) seem to sense the fragility in the foundations of the incumbent job market.

 

___

references

Bangko Sentral ng Pilipinas, CONSUMER EXPECTATIONS SURVEY REPORT 1st Quarter 2024 report, April 12, 2024 bsp.gov.ph