Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation

 

Because credits springing from fiat inflation provide an easy financial edge, they have the tendency to encourage reckless behavior by the chief executives. This is especially the case with managers of large corporations who have easy access to the capital markets. Their recklessness is often confused with innovativeness—Jörg Guido Hülsmann 

In this issue:

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation

I. PSEi 30 1H: Record Revenue, Record Debt — And a 2.6% Economy

II. The PSEi 30 divergence

III. Debt: Concentration Makes The Story Worse

IV. Revenue: Where Did The Growth Come From? Meralco’s Money Illusion

V. Price Controls Don't Make The Real Adjustment Disappear

VI. Jollibee: Margin versus Volume Tradeoff

VII. SM Retail's money illusion

VIII. SMC: When Debt Becomes the Growth Mechanism

IX. Q2: Iran War’s Oil Shock Sharpens The Divergence; Three Balance Sheets, One Problem

X. The Corporate Face of Stagflation

XI. Conclusion: The PSEi 30 Earnings Mirage 

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation 

Record corporate revenue and debt expanded far faster than real GDP growth as policy-suppressed adjustment migrated into prices, margins, investment, and balance sheets. 

I. PSEi 30 1H: Record Revenue, Record Debt — And a 2.6% Economy 

The PSEi 30's 1H 2026 results look remarkably strong — until we ask a more basic question: strong in what sense? 

The figures below are reported corporate results. Even taking the reported numbers at face value, nominal growth in pesos is not, by itself, evidence of real economic growth in output. That is the relevant sense of “money illusion” here: mistaking a change in the unit of account for a change in the underlying quantity—or even quality. Once we make that distinction, the numbers are neither paradoxical nor contradictory. They are consistent with debt-financed nominal expansion occurring alongside weak real growth. 

Revenue surged. Assets surged. Cash surged. Debt exploded! But aggregate earnings fell. And all of this happened while Philippine real GDP grew just 2.6% in 1H and 2.3% in Q2. 

That is not a separate corporate story from the weak GDP, expanding fiscal deficit, and rising public debt already examined in Parts 13 and 14. It is the same story appearing on corporate balance sheets. 

The backdrop is familiar: EO 110's price-suppression scheme, the BSP's five regulatory relief measures, its warnings against NDF speculation, and the defense of the Php 61.75 ‘soft peg’ peso ceiling — all operating while inflation surged and the fiscal and trade deficits widened. Policy can suppress, redistribute, or postpone an adjustment. It cannot repeal the underlying real-resource constraint. 

The PSEi 30 shows where that adjustment appeared on corporate balance sheets. 

II. The PSEi 30 divergence 

1H 2026, aggregate 

Figure 1

Against that: 1H real GDP grew 2.6%, while Q2 real GDP grew just 2.3%. 

Revenue rose more than five times as fast as real GDP. Debt rose more than four times as fast. Net income fell. (Figure 1) 

The corporate sector, therefore, is not experiencing “strong growth” in the real-economy sense. It is experiencing rapid nominal and financial expansion alongside weak real growth. 

And the aggregate numbers conceal an important feature of that expansion: concentration. 

A handful of large conglomerates account for a disproportionate share of the increase in debt, as well as a substantial share of the revenue, assets, and cash behind the index. The result is that the PSEi 30 aggregate is increasingly shaped by the balance sheets of a few very large firms. 

III. Debt: Concentration Makes The Story Worse

Figure 2 

PSEi 30 nonfinancial debt rose by a record Php 654.171B. (Figure 2, upper table and lower chart) 

Twenty of the 26 nonfinancial members added debt. But SMC alone contributed Php 294.1B — roughly 45% of the entire increase — taking its own debt to an unprecedented Php 1.798 trillion, up 19.55% and equivalent to 28.8% of all PSEi 30 outstanding nonfinancial debt. 

The concentration extends beyond SMC. SMC, AEV, and Meralco — the parties to the SMC-AEV-MER gas/power asset transaction, part of the implicit utility bailouts examined last year — together accounted for Php 363.62B, or 56% of the entire increase in PSEi 30 nonfinancial debt. 

Yet, the three largest borrowers overall were SMC, AC, and ICTSI. 

This matters because concentration changes what the aggregate means. 

When the same large balance sheets dominate debt, revenue, assets, and cash simultaneously, the index is no longer a useful proxy for a broad cross-section of independent businesses. A handful of conglomerates increasingly determine the financial appearance of the whole. 

The scale is also significant. The Php 6.251 trillion of PSEi 30 nonfinancial debt is roughly 16.3% of the BSP's total financial-system resources. 

This is not merely a story about leverage inside individual companies. It is a story about the growing weight of a concentrated group of corporate borrowers within the financial system itself. 

SMC is the extreme case. Its Php 1.798 trillion of debt is larger than its entire 2025 revenue and more than eleven times its roughly Php 160 billion equity market capitalization. That is not presented as a conventional measure of debt capacity. It illustrates the mismatch between the financial claims accumulated by the conglomerate and the equity value the market assigns to those claims. 

Acquisitions, asset transfers, refinancing, and debt recycling have expanded SMC's financial structure well beyond the earnings capacity of several of its underlying segments. 

That is where Minsky's framework becomes useful — not as a label, but as a description of the financing process. 

The issue is not simply that SMC carries a large amount of debt. It is that an increasingly large financial structure depends on continued refinancing, asset transactions, and the ability to roll existing obligations forward while earnings growth remains uneven. When operating cash flow is insufficient to service the debt without continued refinancing or the realization of assets, the financing structure evolves to what Minsky called PONZI FINANCE: obligations can no longer be serviced from the cash flows generated by the underlying assets and require new borrowing, asset sales, or other financial transactions to remain current. 

A highly leveraged balance sheet is not automatically a Minsky problem. The problem emerges when the financing structure becomes dependent on the continuation of the financial process that created it. 

The BSP-FSCC's warning about a “wall of maturities” therefore looks different when viewed against this concentration. 

Refinancing risk is not distributed evenly across thirty unrelated companies. A large portion is attached to a relatively small number of very large balance sheets. SMC alone represents an unusually large share of the debt expansion behind the index. 

This also creates a systemic asymmetry. 

When debt becomes concentrated in conglomerates that are economically and politically difficult to allow to fail, leverage can create a form of too-big-to-fail risk even before an actual crisis occurs. The concern is not simply the size of any one company's liabilities. It is the interaction between corporate size, political importance, creditor exposure, and the concentration of those exposures within the banking and financial system. 

The BSP can describe the financial system as “resilient” at the aggregate level while significant fragility accumulates underneath that aggregate. A banking system can remain adequately capitalized while becoming increasingly exposed to the same large counterparties. 

Concentrated corporate leverage therefore exposes concentrated counterparty risk: the failure or forced deleveraging of one major conglomerate can transmit losses through several lenders and financial institutions at once. 

The same concentration also creates a crowding-out problem. 

The issue is not merely that government borrows more. Large corporations and government are drawing on the same underlying pool of financial resources. When conglomerates undertake increasingly large amounts of debt financing without a corresponding increase in productive real investment, they compete with government and other borrowers for savings and bank balance-sheet capacity—coming at the expense of MSMEs. 

That matters because the additional borrowing is not necessarily expanding the economy's productive capacity proportionately. If credit is increasingly being used for acquisitions, refinancing, asset transfers, and balance-sheet restructuring rather than for new productive capacity, the financial claim on future income can grow much faster than the real income available to service it. 

The result is a reinforcing process: 

weak real growth → nominal expansion → heavier corporate borrowing → concentrated leverage → greater refinancing dependence → greater financial fragility. 

The PSEi 30's headline growth therefore becomes less informative the deeper we look into its composition. Revenue is expanding, assets are expanding, cash is expanding, and debt is expanding — but earnings are not keeping pace, real GDP is weak, and an increasing share of the financial expansion is concentrated in a handful of very large borrowers. 

The divergence is not a statistical curiosity. 

It is the balance-sheet expression of the adjustment.         

IV. Revenue: Where Did The Growth Come From? Meralco’s Money Illusion

Figure 3

PSEi 30 revenue surged 13.51% — banks +10.95%, nonfinancials +13.8%. SMC, AEV, and Meralco were the biggest peso revenue gainers. At first glance, this looks like broad corporate resilience. But revenue is a peso measure: it tells us the value of transactions, not the quantity of goods and services behind them. (Figure 3, upper window) 

Meralco makes the distinction almost perfectly. 

Meralco: stagflation in miniature. Physical electricity sales barely moved — Q2 GWh rose just 0.66%, while 1H GWh fell 0.46% — essentially flat to contracting, tracking the broader slowdown. Yet peso electricity sales over the same periods rose 26.4% in Q2 and 17% for the half. (Figure 3, lower graph) 

This is the money illusion in the revenue numbers: the peso value of sales rose dramatically while the underlying physical quantity barely changed. The apparent expansion is therefore much larger in nominal terms than in real activity. 

Income followed the peso line, not the volume line: up 21.14% in Q2 and 12.7% for the half, on revenue growth of 24.65% and 15.7%, respectively. 

The wedge is FIT-All, GEA-All, and other generation/transmission pass-through charges — regulatory and redistributive add-ons, not demand. Consumers pay more through the bill; that additional revenue is redistributed through the system to generators, transmission, and designated energy programs, producing a much higher peso value without a comparable rise in physical consumption. That is the money illusion in concrete form: the peso value of electricity sales rises sharply while the underlying physical quantity barely moves. 

And the "resilient earnings" narrative carries its own balance-sheet cost. Meralco's debt rose 6.5% to a record Php 247.36 billion over the same window. Under the current structure, that increase is not simply additional corporate borrowing in the abstract. It forms part of the balance-sheet transfer associated with the SMC-AEV-MER transaction — the same process examined earlier in the context of the implicit utility bailouts. What appears in the aggregate as stronger revenue and earnings is therefore occurring alongside a redistribution of financial claims and liabilities across the corporate balance sheets. 

Meralco consequently captures both sides of the process in miniature: the nominal value of economic activity rises far faster than its physical volume, while the accompanying balance-sheet transfers create additional financial claims without a comparable expansion of real productive capacity. SMC shows the same process at far greater scale. 

V. Price Controls Don't Make The Real Adjustment Disappear 

Recent BusinessWorld/Bloomberg reporting on companies adapting to tight consumer budgets adds a useful, independent dimension here — corporate behavior confirming the balance-sheet read rather than just corroborating it after the fact. Shakey's Pizza Asia posted a one-third drop in first-half profit and is slowing expansion, citing inflation and fuel costs weakening non-essential spending. Jollibee itself, despite improved customer visits, cut its same-store-sales forecast, profit-growth outlook, and store-opening plans. Monde Nissin is switching to lower-cost ingredients and staggering price increases of 1-5% by product rather than raising prices outright. Century Pacific Food, after holding prices flat for two years, is now raising them 4-5% while planning smaller increases ahead. 

These are companies signaling, through their own operating decisions, that they read the demand environment as weaker than their revenue lines suggest — the same conclusion reached here from the balance sheets, arrived at independently from the boardroom. 

That reporting also points to a broader menu of adjustment worth naming explicitly. When firms can't or won't fully pass higher costs through the sticker price, the adjustment migrates elsewhere: 

• price inflation (raise the price),
• shrinkflation (keep the price, shrink the quantity),
• skimpflation (keep the price, cut the quality — Monde Nissin's ingredient substitution is a live example),
• sneakflation (keep the headline price but raise the effective price through less-visible fees or charges — for example, utility FIT-All and GEA-All charges, or added service, delivery, and platform fees)
• margin compression (absorb the cost),
• cost-cutting (trim inputs, labor, expansion — Shakey's slowing its rollout), or
• balance-sheet expansion (borrow, refinance, or transfer assets to keep the structure moving — SMC and Meralco).

The price can be capped; the loaf can't. It gets smaller, or the ingredients get cheaper, or the margin gets squeezed, or the investment gets postponed, or the debt fills the gap. 

Price suppression can suppress the price adjustment. It cannot suppress the underlying real-resource constraint — the adjustment simply moves to a different line item. 

VI. Jollibee: Margin versus Volume Tradeoff 

Jollibee Food Corporation’s Q2 net income rose 3% to Php 3.519 billion, but 1H net income was still down 16.7% to Php 4.928 billion.

Figure 4

Domestic sales rose 5.61% in Q2 and 6.8% in 1H, despite a 2.7% increase in store count. Against Q2 inflation of 6.8%, real domestic sales were essentially stagnant to negative. More stores generated only roughly inflation-level growth in peso sales. (Figure 4, topmost pane) 

JFC defended profitability where physical volume could not deliver it: margin over volume. That is a rational corporate response to constrained real demand, but it is not evidence of a booming consumer economy. With GDP growing only 2.3% in Q2, the more direct reading is that JFC was protecting margins in an environment where real domestic demand was weak. (Figure 4, middle diagram) 

JFC's balance sheet adds another dimension. Debt rose 13.6% to Php 93.2 billion over the same period. That increase should be read in the context of JFC's entire multinational financial structure — its international expansion and operations, acquisitions, and broader funding requirements — rather than reduced to a purely domestic story. But that broader scope does not make the debt irrelevant to the analysis. It shows that the company's nominal sales and earnings resilience is occurring within a substantially expanding balance sheet.

Jollibee therefore provides another expression of the same process: nominal sales can rise while real domestic volume remains weak; the corporation responds by protecting margins and adjusting operations; and the resulting performance sits within an expanding financial structure that extends beyond the domestic market. The peso-denominated numbers can therefore look resilient without representing comparable growth in the underlying quantity of goods and services. 

VII. SM Retail's money illusion 

SM Retail grew 5.42% in 1H 2026. At the parent-company level, SM Investments' revenue rose 7.53% and net income 6.38%, but those are consolidated figures covering businesses beyond retail. The relevant consumer-sector measure here is SM Retail's own 5.42% growth.(Figure 4, lowest image) 

That number looks less impressive against the inflation environment. Q2 CPI was 6.8% while core CPI 4.1%, meaning SM Retail's nominal growth was below the rate at which consumer prices were rising or slightly above the ex-food and ex-energy CPI. 

In purchasing-power terms, a 5.42% increase in retail activity does not represent real growth if prices were rising faster. 

There is another reason the number deserves scrutiny: SM's retail footprint was expanding at the same time. SM Prime opened two new Philippine malls in 2025 — SM City Laoag and SM City La Union — and opened SM City Zamboanga in March 2026, its 90th Philippine mall. Thus, the 5.42% growth in SM Retail occurred while the broader SM retail platform was adding physical capacity. 

That makes the result a useful indicator of the consumer-side stagflation problem. The business was not merely operating the same stores and selling at higher prices; the broader retail network was expanding as well. Yet SM Retail's nominal growth still lagged Q2 inflation. 

The distinction is the money illusion: more pesos can be recorded as sales without a comparable increase in the quantity of goods purchased. Some of the nominal increase can come from higher prices, while some can come from additional stores and retail capacity. What remains is the underlying real expansion in consumer demand. 

On the available figures, that real expansion appears weak. SM Retail was adding to its physical footprint, yet its nominal growth was still below the prevailing rate of consumer-price inflation. The headline 5.42% therefore overstates the strength of the underlying consumer economy when read without the price effect. 

SM Retail is consequently another expression of the same stagflationary process: the nominal economy grows, but purchasing power and real consumer demand do not keep pace. 

VIII. SMC: When Debt Becomes the Growth Mechanism 

SMC's nonfinancial debt increased by Php 294.1 billion in 1H 2026, reaching Php 1.798 trillion (!). Cash, assets, and revenue all surged. Income did not follow. Of SMC's eight segments, only three posted positive 1H income growth — infrastructure +29%, GSMI +3%, and food +8% — while the rest declined. 

Petron and Global Power delivered substantial revenue growth, but earnings moved in the opposite direction: Petron's fell 27% and Global Power's 7%. Revenue can therefore rise sharply without a corresponding increase in underlying profitability. 

Petron's case is particularly instructive because its revenue growth occurred amid an extraordinary oil-supply shock rather than normal operating conditions. The Iran conflict disrupted traditional Middle Eastern supply routes, prompting Petron to secure alternative sources. It purchased 2.48 million barrels of Russian crude as an emergency measure, with the government encouraging oil companies to find alternative supplies. This was not simply a normal sourcing decision or evidence of a structural improvement in Petron's operating economics; it was part of an exceptional policy and supply response to the disruption in support of EO-110. 

Media accounts that attribute SMC's earnings decline primarily to foreign-exchange losses and one-off gains associated with the SMC-AEV-MER transaction explain why reported income moved during the period. They do not explain the larger divergence: why did SMC add Php 294.1 billion of debt while earnings capacity across the conglomerate remained generally weak?

Figure 5

Nor is the Php 294.1 billion increase a one-off event. SMC's debt has been rising since at least 2013. The largest quarter-on-quarter increase occurred during the first oil shock in 2022, while the Php 129.57 billion increase in Q2 2026 was the second-largest quarterly increase since Q3 2022. The current surge is therefore another stage in an established process of balance-sheet expansion. (Figure 5, upper visual) 

The character of the borrowing matters. The cash-flow pattern shows that SMC is increasingly borrowing to refinance existing obligations, adding to the debt stock while earnings remain weak. This is the mechanism that brings Minsky's Ponzi-finance concept into view: when operating earnings are insufficient to reduce the debt burden, the financial structure becomes dependent on continued refinancing to sustain itself. Debt is no longer merely financing expansion; increasingly, further borrowing is required to maintain the existing financial structure—even as the cost of borrowing rises. (Figure 5, lower chart) 

This also gives the BSP's regulatory-relief measures and its warning about a “wall of maturities” a more concrete significance. The measures can be understood as institutional accommodation of a refinancing problem that has become increasingly important for large, highly leveraged borrowers such as SMC. They provide additional room for maturities to be rolled forward and the adjustment to be deferred; they do not eliminate the underlying liabilities. 

That is the deeper Minskyan concern. Refinancing postpones the adjustment, but does not remove it. When refinancing itself adds to the debt stock, the continuation of the financial structure increasingly depends on the availability of still more financing—and only an easy money environment accommodates this. 

SMC's 1H 2026 results therefore reveal a widening gap between financial (balance sheet) expansion and earnings capacity. Debt, assets, cash, and nominal revenue expanded rapidly while earnings remained generally weak. The balance sheet is no longer simply recording the growth process. Increasingly, it has become part of the mechanism sustaining it. 

IX. Q2: Iran War’s Oil Shock Sharpens The Divergence; Three Balance Sheets, One Problem

Figure 6

Aggregate Q2 net income grew just 1.79% — banks −0.02%, nonbanks +2.27%, with 19 constituents up and 11 down. Revenue, by contrast, surged 18.34% — nonbanks +19.13%, banks +11.99%.  (Figure 6, upper table) 

The Philippine banking system itself grew 7.62% in Q2—propped up by BSP relief measures despite pandemic era financial losses. (Figure 6, lower graph) 

Revenue +18.34% against income +1.79% is the sharpest single number in this piece: nominal activity expanded dramatically while the bottom line barely moved. The divergence is difficult to reconcile with the language of broad-based corporate strength. It is more consistent with an economy in which nominal values and financial claims are expanding faster than the earnings and real activity needed to support them. 

This is where the PSEi 30 closes the loop with the rest of the series. The government expanded its balance sheet to sustain fiscal spending, with public debt growing faster than nominal and real GDP. Banks expanded credit. Corporations expanded debt. Households absorbed record peso consumer loans. Real GDP grew only 2.3% in Q2. 

These are not separate phenomena. They are interconnected balance sheets. Government borrowing creates claims against future fiscal resources. Bank lending creates claims against future household and corporate income. Corporate borrowing creates claims against future corporate cash flows. The financial system can transfer purchasing power across time, finance acquisitions, refinance existing obligations, sustain operating structures, and facilitate asset transfers. But these transactions do not remove the underlying resource constraint; they redistribute claims against it. 

The more important question, therefore, is what happens when institutions repeatedly prevent those claims from being reconciled through structural adjustment? 

That is the significance of the policy sequence examined throughout this series.

• EO 110 suppresses or redistributes price adjustment.
• BSP regulatory relief accommodates stressed balance sheets.
• The exchange-rate regime resists adjustment in the currency.

Each intervention can relieve pressure in the short run, but the underlying imbalance does not disappear simply because its immediate expression has been suppressed. 

The adjustment is displaced — into quantities, quality, margins, investment, debt, refinancing, or other balance-sheet transfers. 

This is the institutional-control problem identified in Luc Lelievre's analysis of why apparently stable systems can become increasingly fragile: interventions that preserve stability at one point in the system can prevent the signals and adjustments through which underlying errors are corrected. 

The consequence is cumulative. When structural adjustment is repeatedly postponed, debt finance increasingly becomes the mechanism through which imbalances are carried forward. Balance sheets expand to absorb pressures that prices, markets, and institutions have been prevented from fully clearing. That can sustain nominal activity for a time, but it also permits malinvestment, misallocation, and financial claims to accumulate against an underlying real economy that is growing much more slowly. 

That is what the H1 2026 data reveal: not simply financial claims growing faster than output, but a system in which policy accommodation is allowing the divergence to persist and increasingly shifting the adjustment onto balance sheets. 

X. The Corporate Face of Stagflation 

The four companies examined above show four different margins of adjustment: 

• Meralco — physical output barely moves while peso revenue surges: price and redistribution. 
• Jollibee — sales barely keep pace with inflation while margins recover: margin over volume. 
• SM Retail — nominal sales growth remains below inflation despite an expanding retail footprint: money illusion and weak real demand. 
• SMC — debt, assets, cash, and revenue expand while earnings remain generally weak: balance-sheet expansion and refinancing. 

And beneath all four sits an adjustment that does not necessarily appear in headline financial statements: shrinkflation, skimpflation, sneakflation, margin compression, deferred investment, lower-quality substitution, and debt accumulation. The loaf gets smaller; the ingredient gets cheaper; the product becomes thinner; the expansion is postponed; the fee appears somewhere else; or the balance sheet absorbs the pressure. 

The price can be suppressed. The adjustment cannot. 

That is why the corporate response to stagflation cannot be read from CPI alone. The adjustment can move through price, quantity, quality, margins, investment, or debt, and different companies are choosing different combinations of the same underlying menu. 

What looks like stability in one line of the accounts can therefore represent adjustment somewhere else. And when policy repeatedly suppresses the visible adjustment, the hidden adjustment increasingly migrates into balance sheets — where it appears first as accommodation, then as leverage, and eventually as fragility. 

XI. Conclusion: The PSEi 30 Earnings Mirage 

Strong in what sense? 

The PSEi 30's 1H 2026 results look robust: revenue reached Php 3.974 trillion, assets Php 33.417 trillion and cash Php 1.608 trillion, but nonfinancial debt Php 6.251 trillion. 

Yet revenue grew 13.51% while real GDP grew only 2.6% in 1H and 2.3% in Q2. Debt grew 11.69% while aggregate net income fell 1.29%. The headline financial expansion is therefore not evidence of equivalent real economic expansion. 

That is the money illusion at the center of the PSEi 30. Nominal values rise and create the appearance of growth even when the underlying quantity or quality of economic activity does not rise proportionately. Meralco's peso electricity sales rose sharply while physical consumption barely moved. Jollibee's domestic sales grew roughly at the rate of inflation. SM Retail's nominal growth remained below inflation despite an expanding retail footprint. SMC's debt, assets, cash, and revenue expanded while earnings remained generally weak. 

But the money illusion does not arise in isolation. It is the financial appearance produced by the stagflationary process. Real growth remains weak while prices rise, purchasing power is constrained, and the adjustment that would ordinarily expose the imbalance is repeatedly suppressed, redistributed, or postponed. EO 110, BSP regulatory relief, and the exchange-rate regime operate on different parts of that adjustment process. They can alter where the pressure appears without eliminating the underlying constraint. 

The result is a displacement of adjustment. It appears in prices, volumes, product quality, margins, investment, debt, and refinancing. What cannot be absorbed through the price is absorbed through quantity; what cannot be absorbed through quantity is absorbed through quality or margins; what cannot be absorbed operationally can migrate onto the balance sheet. Financial expansion can therefore continue even while real economic expansion remains weak. 

That is what the PSEi 30 adds to the stagflation series. The corporate sector does not merely reflect weak growth and inflation; its balance sheets show how the economy is absorbing the adjustment. Nominal revenue can surge while real demand stagnates. Debt can expand while earnings weaken. Financial claims can accumulate while productive capacity and real output lag behind. 

The price can be suppressed. The adjustment cannot. 

The PSEi 30 is where that adjustment becomes visible in corporate form: stagflation underneath, money illusion on the surface, and balance-sheet expansion in between. 

____

References: 

Prudent Investor, Stagflation Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026 

Prudent Investor, Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment, August 2, 2026 

Prudent Investor, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, November 23, 2025 

Prudent Investor, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, December 7, 2025 

Luc Lelièvre, Why Stable Systems Fail: The Illusion of Institutional Control, Mises.org, May 18, 2026

 

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

  

Central bankers always try to avoid their last big mistake. So every time there's the threat of a contraction in the economy, they'll over stimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one—Milton Friedman 

In this issue:

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

I. Introduction: Markets Are Repricing the Stagflation Regime

II. Sovereign Repricing Is Becoming a Banking Problem

III. The Liquidity Boom Concealed Structural Fragility

IV. March 2026: Hidden Cost of Relief Measures

V. Bank Liquidity Improved—But Mainly Through Deposit Expansion

VI. The Wile E. Coyote’s Denominator Effect

VII. Sovereign Absorption, AFS Portfolios, and Hidden Duration Stress

VIII. Reflexivity: When Accommodation Starts Feeding Instability

IX. The Savings-Investment Gap: From Development Narrative to Stagflationary Dependence

X. Why the Oil Shock Broke Mainstream Models

XI. The Banking Contradiction: Why System Normalization Is a Mirage

XII. Conclusion: Accommodation Without Resolution Redux 

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning 

How inflation, sovereign dependence, and financial repression are turning banks into the shock absorbers of a stagflationary regime. 

I. Introduction: Markets Are Repricing the Stagflation Regime 

On Friday, May 15, 2026, the USDPHP closed at a record 61.721—another historic low for the peso and its 16th record high of the year. Every prior “comfort level” for the currency has effectively been erased. The peso is now among Asia’s worst-performing currencies year-to-date. 

Yet the peso’s decline may not even be the most important market signal.

Figure 1

Far more consequential is the ongoing repricing inside the domestic bond market. BVAL Treasury yields—particularly at the belly of the curve—have surged beyond prior cycle highs, while longer-dated maturities are rapidly approaching 2022 stress levels (Figure 1) 

The move no longer resembles a temporary inflation scare or speculative overshoot. Markets are increasingly repricing sovereign, inflation, and currency risk simultaneously. 

The distinction matters. 

Peso weakness reflects external imbalance. But rising bond yields directly strike the balance sheets of the Philippine banking system.

Banks sit at the center of the country’s macro-financial structure. Backstopped by the BSP, they financed the pandemic rescue cycle, intermediated the post-pandemic liquidity surge, absorbed expanding government debt issuance, and enabled credit expansion into politically favored sectors. In the process, banks became increasingly exposed to the very distortions created by the policies that artificially sustained nominal growth.

Mainstream narratives continue to describe the banking system as “well-capitalized,” “liquid,” and “resilient.” But these are largely backward-looking accounting conditions rather than forward-looking assessments of systemic vulnerability.

The issue is not whether banks currently satisfy regulatory ratios. The issue is the sustainability of a macro-financial structure that has become increasingly dependent on continual liquidity accommodation, regulatory forbearance, and suppressed volatility to prevent the emergence of deeper systemic stress.

That is the deeper significance of stagflation.

Stagflation is not merely the coexistence of inflation and slowing growth. It is the progressive collision between inflation persistence, fiscal dependence, external fragility, and financial leverage.

And in the Philippines, those pressures are increasingly converging on the banking system.

II. Sovereign Repricing Is Becoming a Banking Problem 

Much of the recent discussion surrounding Philippine market turbulence has focused on USDPHP. But the more consequential development may be occurring inside the domestic bond market. 

The scale of the Philippine bond selloff is not background noise. It is the primary transmission mechanism through which macroeconomic stress migrates into bank balance sheets. 

Figure 2

Philippine Treasury securities have been among Asia’s worst-performing bonds in 2026 following the Iran War, with Philippine 10-year yields rising the most among ASEAN bonds. (Figure 2, top and middle windows)

Ironically, this deterioration has unfolded even as the Philippines prepares for inclusion in the JP Morgan Emerging Market Debt Index in January 2027. Would JPMorgan issue a downgrade? 

The significance of the selloff is frequently misunderstood.

For banks, rising yields are not merely inconvenient market fluctuations. Higher yields translate directly into mark-to-market losses, duration stress, weaker securities valuations, and tighter liquidity conditions.

This matters because Philippine banks substantially increased exposure to government securities beginning in 2015, with the trend accelerating during the pandemic era. Banks’ net claims on the central government (NCoCG) rose, alongside public debt hitting all-time highs last March with NCoCG at PHP 6.258 trillion accounting for 33% of the PHP 18.488 trillion public debt. (Figure 2, lowest image)

The pandemic response institutionalized a regime in which: 

• fiscal deficits exploded,
• BSP liquidity injections surged,
• banks absorbed massive sovereign issuance,
• and government debt became increasingly embedded as collateral throughout the financial system. 

That framework functioned as long as: 

• inflation remained politically manageable,
• the peso avoided disorderly depreciation,
• and yields stayed artificially suppressed.

Stagflation changes the equation.

Persistent inflation forces markets to demand higher nominal yields. External fragility pressures the currency. Fiscal dependence requires continual debt issuance even as government borrowing increasingly crowds out private credit formation. Every upward move in yields simultaneously erodes the market value of existing bond holdings. 

This is why the present environment matters. 

• The repricing is occurring precisely when: 
• public debt remains elevated,
• fiscal deficits remain structurally wide,
• external financing conditions are tightening,
• and growth quality is deteriorating.

In effect, banks are becoming trapped between sovereign financing dependence and market repricing. 

The system cannot easily tolerate market-clearing yields because the fiscal structure, banking system, and asset markets have all become deeply dependent on suppressed financing costs.

Yet suppressing yields amid inflation and peso weakness merely transfers pressure into currency depreciation, financial repression, and deeper balance-sheet distortions.

This is the core contradiction of financial repression. 

The state increasingly depends on banks to intermediate expanding sovereign debt burdens even as inflation and currency weakness steadily erode the real foundations supporting those balance sheets.

III. The Liquidity Boom Concealed Structural Fragility

The banking pressures now emerging did not appear spontaneously. They were incubated even before the post-pandemic liquidity cycle.

For years, policymakers and mainstream economists treated liquidity expansion as a stabilizing force. Rapid M2 and M3 growth were interpreted as signs of recovery, resilience, and normalization.

Figure 3

Credit (domestic claims) and liquidity (M2) expansion as a share of GDP have been rising since 2011, accelerated in pre-pandemic 2019, and have since reached key milestones. The GDP’s ever-deepening dependence underscores bank-led financialization, even as the GDP rate continues downward path. (Figure 3, topmost pane)

But liquidity creation is NEVER neutral.

The critical issue is not simply the quantity of money creation, but where newly created liquidity enters the system first and how credit allocation is shaped by political and institutional incentives.

In classic Cantillon effect-fashion, the earliest beneficiaries of post-pandemic liquidity expansion were sectors closest to BSP’s sovereign financing and bank credit intermediation—the primary sources of money creation. 

Liquidity increasingly flowed into: 

• government financing,
• real estate carry structures,
• politically connected infrastructure,
• speculative financial activities,
• electricity and utility-related lending,
• and consumer leverage amplified by credit card rate caps.

As a result, credit card lending surged even as household purchasing power weakened. 

Electricity and utility-related lending climbed sharply since 2024 despite deteriorating GDP. (Figure 3, middle graph) 

Consumer finance became one of the banking system’s primary growth engines since the pandemic even as real wage pressures intensified. (Figure 3, lowest diagram) 

This created the appearance of nominal resilience.

But much of the expansion reflected liquidity recycling rather than productivity-driven growth. The banking system increasingly functioned as a transmission mechanism for sustaining aggregate demand despite weakening real income conditions. 

That distinction is critical.

When economies rely on debt expansion to preserve consumption amid deteriorating purchasing power, balance sheets gradually become more fragile beneath the surface.

Stagflation magnifies this process because inflation compresses household cash flows while slowing real activity weakens repayment capacity.

Banks may initially report: 

• strong nominal loan growth,
• healthy net interest margins,
• and stable headline balance-sheet conditions.

But over time, the quality of that growth deteriorates. 

The result is a system where: 

• nominal lending remains elevated,
• asset prices become increasingly policy-dependent,
• and underlying credit quality quietly weakens beneath the surface.

This is why banking stress under stagflation is often delayed rather than immediate. 

Liquidity masks fragility for awhile. 

Then inflation, higher yields, and slowing real activity begin to expose it. 

IV. March 2026: Hidden Cost of Relief Measures 

The BSP’s April 2026 regulatory and loan relief measures—officially framed as emergency support for the oil shock—should not be interpreted as neutral policy tools. 

Relief regimes redistribute risk asymmetrically. 

Large banks, politically connected borrowers, and institutions with privileged regulatory access typically receive greater flexibility, balance-sheet protection, and time than smaller firms or ordinary households. In that sense, crisis accommodation functions not merely as stabilization policy, but as a mechanism that risks deepening moral hazard and reinforcing regulatory capture. 

This institutional structure matters because the BSP’s policymaking apparatus remains deeply intertwined with the banking establishment itself, populated largely by former executives from major domestic banks and multinational financial institutions. 

The issue is not necessarily conspiracy, but institutional incentive alignment: policymakers shaped by the same financial architecture they supervise will naturally tend to prioritize preservation of that structure. Experience and familiarity shapes incentives. Networks shape policy reflexes. Politically connected interest groups also shape policy trajectories. 

Against that backdrop, March 2026 marked the transition phase before the formal implementation of April’s relief measures. 

Echoing aspects of the pandemic playbook, banks were likely already repositioning balance sheets in anticipation of regulatory flexibility, liquidity support, prudential accommodation, and accounting relief.

V. Bank Liquidity Improved—But Mainly Through Deposit Expansion 

March banking data showed a modest improvement in headline liquidity conditions, though the rebound was driven primarily by deposit expansion rather than internally generated balance-sheet strengthening.

Figure 4

Cash and due from banks posted their first expansion since August 2024, lifting the cash-to-deposit ratio marginally from February’s record lows. Yet despite the rebound, liquidity buffers remained historically thin. (Figure 4, topmost image)

The apparent improvement largely reflected accelerating deposit growth.

Peso and FX deposits both strengthened during Q1, consistent with the sharp rebound in M2 and M3 liquidity growth. BSP accommodation had likely already begun filtering through the banking system even before the formal April relief package. (Figure 4, middle visual)

Yet beneath the headline stabilization, underlying liquidity conditions remained fragile.

Liquid assets-to-deposits continued drifting downward toward pre-rescue March 2020 levels, suggesting banks were still operating with structurally compressed liquidity cushions despite years of extraordinary accommodation.

The apparent stabilization therefore reflected funding inflows more than genuine liquidity resilience.

That distinction matters because stagflation eventually tests liquidity quality—not merely liquidity quantity.

VI. The Wile E. Coyote’s Denominator Effect 

March banking data appeared superficially stable. 

Headline nonperforming loan (NPL) ratios remained broadly steady. But this stability increasingly resembles what we have repeatedly described as the banking system’s Wile E. Coyote denominator effect—where deteriorating fundamentals become statistically obscured by rapid balance-sheet expansion. (Figure 4, lowest chart)

Gross nonperforming loans climbed to fresh record nominal highs in March or bad loans continued rising.

Denominator growth simply outran visible recognition or rapid Total Loan Portfolio (TLP) expansion temporarily compressed headline NPL ratios, masking the deterioration emerging underneath the surface.

Stable ratios can therefore conceal worsening underlying conditions.

The same pattern increasingly appeared in loan-loss provisioning.

Figure 5

Allowance for credit losses rose to near-record levels. At first glance, this appeared reassuring—a sign of prudence and reserve accumulation. (Figure 5, topmost chart)

But once again, denominator growth mattered.

Provisioning growth lagged behind TLP expansion, causing reserve ratios to soften despite intensifying macroeconomic stress.

This raises an increasingly uncomfortable question: 

Are provisions genuinely strengthening resilience, or merely struggling to keep pace with an increasingly leveraged and slowing credit structure? 

Under normal expansionary conditions, rapid credit growth can dilute emerging stress and stabilize reported metrics. 

But stagflation changes the equation. 

If slowing growth weakens repayment capacity while inflation compresses household cash flow, denominator support itself begins to weaken. 

That is when the Wile E. Coyote effect comes into play. It exposes the statistical artifice hidden behind the headline numbers. What once appeared statistically stable deteriorates rapidly once loan growth slows and hidden losses become harder to dilute. 

Like Wile E. Coyote, once he realizes he has run far past the cliff, gravity takes hold. 

VII. Sovereign Absorption, AFS Portfolios, and Hidden Duration Stress 

The sovereign absorption trade also intensified.

Banks continued aggressively accumulating government-linked assets, reinforcing the increasingly symbiotic relationship between fiscal deficits and bank balance sheets.

Held-to-Maturity (HTM) securities presently reclassified as “Debt Securities- Net of Amortization” climbed to record highs, reflecting continued sovereign intermediation. HTMs accounted for 67% of NCoCG. (Figure 5, middle chart)

At the same time, Available-for-Sale (AFS) portfolios surged sharply. (Figure 5, lowest diagram)

On paper, rising securities holdings appear consistent with liquidity strength.

Under stagflation, however, they increasingly become a source of vulnerability.

The recent repricing in Philippine Treasury yields—particularly at the belly of the curve—directly pressures AFS portfolios through mark-to-market losses. 

This creates a predictable institutional response.

Banks increasingly face incentives to migrate securities toward HTM classification, where unrealized market losses avoid immediate recognition.

But this merely alters accounting treatment.

It does not eliminate duration risk.

HTM migration may suppress accounting volatility, but it also reduces balance-sheet flexibility by locking assets into longer-duration structures that become less liquid under stress. 

In effect, banks increasingly face a tradeoff between accounting stability and actual balance-sheet resilience. 

Signs of strain are already beginning to emerge beneath headline stability.

Figure 6

Banking sector’s income growth remained near stagnation in Q1 2026, rising only 2.86%, as accumulated market losses continued suppressing profitability. Financial market-related losses remained elevated at roughly Php 43.5 billion—persistently sustained since Q2 2025 and approaching pandemic-era stress peak levels recorded in Q4 2020. (Figure 6, topmost pane)

At the same time, balance-sheet pressures intensified. Despite record investment holdings, accumulated foreign exchange and fixed-income valuation losses surged toward Php 120 billion in March, revisiting conditions last seen during the December 2022 repricing cycle. Valuation losses have accompanied the spike in 10-year yields. (Figure 6, middle chart)

At the same time, dependence on wholesale funding continued rising, with bank borrowings reaching fresh record highs in March. (Figure 6, lowest graph)

These developments matter because they suggest the banking system entered the oil-shock phase already carrying unresolved vulnerabilities—even before the full effects of stagflation have emerged.

VIII. Reflexivity: When Accommodation Starts Feeding Instability 

The deeper problem is that banking conditions are becoming increasingly reflexive.

• BSP accommodation boosts liquidity.
• Banks expand nominal credit.
• Credit growth reinforces inflation persistence.
• Inflation pressures bond yields higher.
• Higher yields weaken securities portfolios.

Banks then become increasingly dependent on regulatory relief, accounting migration, and additional liquidity support to preserve stability.

Authorities subsequently face pressure to deliver even more accommodation to prevent broader financial stress.

Rather than resolving fragility, accommodation increasingly delays recognition while compounding the imbalances generating the stress itself.

This is why March 2026 matters.

The banking system did not enter the oil-shock phase from a position of clear strength.

It entered with:

• thin liquidity cushions,
• rising sovereign exposure,
• growing duration risk,
• weakening profitability quality,
• and balance sheets increasingly dependent on denominator growth to suppress visible deterioration.

In that sense, the BSP’s April relief measures do not represent resolution. 

They may instead buy time at the cost of deeper sovereign dependence, greater balance-sheet distortion, and the continued accumulation of unresolved imbalances. 

What emerges is not crisis resolution, but the institutionalization of permanent accommodation as the operating framework of the financial system. 

IX. The Savings-Investment Gap: From Development Narrative to Stagflationary Dependence

Figure 7

One of the least discussed yet the most critical indicator of the Philippine economy’s underlying fragility resurfaced in Q1 2026: the savings-investment (S-I) gap widened to Php 1.03 trillion, the largest in two years. (Figure 7, upper image)

At first glance, orthodox macroeconomic interpretation treats this as manageable—even desirable.

Weak private demand supposedly justifies larger public spending to sustain GDP growth.

Under this framework, government borrowing and expenditure become stabilizing tools: when households retrench and private firms hesitate, the state steps in as spender, borrower, allocator, and increasingly, guarantor of aggregate demand.

But this framing obscure deeper structural problems.

The S-I gap’s weakness as a framework begins with the fact that it is fundamentally an accounting identity: 

savings minus investment equals the current account balance. 

But accounting identities explain what balances, not whether the underlying structure generating those balances is sustainable. 

A widening S-I gap signals that domestic savings are increasingly insufficient to internally finance the economy’s investment requirements. 

That gap must be financed somehow:

• domestic borrowing,
• foreign borrowing,
• monetary accommodation,
• or inflationary erosion of purchasing power. 

In practice, the Philippines has increasingly relied on all four. 

Yet even the accounting itself deserves scrutiny. 

GDP-based national income statistics classify government construction and public expenditures as “investment” regardless of whether such projects satisfy market tests of profitability, cash-flow viability, or sustainable demand. 

Unlike private capital formation—disciplined by profit and loss—politically allocated spending often survives through taxation, subsidies, refinancing, regulatory privilege, or continued deficit support. 

That distinction matters. 

The deeper issue is not merely that investment exceeds savings. 

The issue is whether debt-financed and liquidity-supported investment generates sufficient productive capacity to repay the claims being created today. 

If not, the system gradually becomes dependent on:

• continual debt issuance,
• BSP accommodation,
• financial repression,
• inflation leakage,
• and sustained regulatory interventions

simply to maintain nominal growth. 

This is where the government debt story becomes inseparable from the S-I gap. 

The Philippines increasingly appears trapped in a feedback loop where weak domestic savings require greater dependence on debt expansion, while debt-financed growth itself weakens incentives for genuine savings formation. 

Public debt may still appear manageable relative to advanced economies. 

But such comparisons are misleading.

The issue is not merely debt-to-GDP ratios. Q1 debt/GDP hit 65.2%—a 21 year high, although the Palace did raise their supposed ceiling/ debt metric to 70% last year. (Figure 7, lower graph) 

The issue is whether the economy possesses a sufficiently productive and self-sustaining capital structure capable of carrying rising debt burdens without continual intervention. 

Much of recent growth has increasingly depended on: 

• public spending,
• sovereign borrowing,
• liquidity expansion,
• credit-financed speculation and capital misallocation,
• and consumption smoothing through leverage. 

Banks increasingly sit at the center of this arrangement.

As fiscal financing requirements expand, financial institutions absorb rising sovereign issuance, redirecting balance sheets toward government exposure. Domestic savings that might otherwise finance entrepreneurial activity and decentralized capital formation increasingly fund deficit spending instead. 

This is the sovereign-bank nexus. 

The more the state depends on debt expansion, the more banks become intertwined with fiscal sustainability itself. 

The result is not necessarily immediate displacement, but gradual crowding out through balance-sheet absorption. Capital increasingly flows toward politically backed financing channels rather than decentralized entrepreneurial allocation. Over time, this dynamic contributes to rising funding costs, weaker private-sector dynamism, and greater systemic dependence on policy support. 

This dynamic helps explain the coexistence of:

• slowing real growth,
• persistent inflation pressures,
• weakening household balance sheets,
• deteriorating external accounts,
• peso weakness,
• and repeated liquidity accommodation. 

The S-I gap therefore becomes more than a macroeconomic statistic. 

It represents a blueprint of the political economy’s development structure itself. 

The widening imbalance reflects an institutional preference for:

• demand management over productivity reform,
• centralized allocation over decentralized capital formation,
• and short-term GDP optics over long-term savings formation. 

Under stagflationary conditions, these dependencies become progressively harder to sustain without some combination of:

• higher inflation,
• deeper financial repression,
• currency weakness,
• slower real growth,
• or escalating policy interventions.

The irony is difficult to ignore. 

Policies justified as temporary stimulus to compensate for private-sector weakness may gradually become one of the mechanisms entrenching that weakness in the first place. 

X. Why the Oil Shock Broke Mainstream Models 

The recent Iran War oil shock exposed more than a forecasting error. It revealed a deeper epistemological problem embedded in mainstream macroeconomics—and the fragility of the broader economic structure underlying its models.

Consensus inflation forecasts largely treated price pressures as transitory and primarily supply-driven. Yet econometric models depend on assumptions of relatively stable relationships between variables derived from past statistical regularities. Under asymmetric policy intervention, regime shifts, and politically conditioned responses, however, the sequence and transmission of economic effects become nonlinear and unstable.

Here, Hayek’s knowledge problem resurfaces. Dispersed human adaptation cannot be compressed into static coefficients without losing critical information. Households, firms, banks, and investors continuously adjust behavior in response to policy signals, financing stress, and deteriorating expectations. Besides, aggregates don’t capture individual utilities.

Once BSP and government intervention themselves became dominant market variables—through FX defense, liquidity management, subsidies, emergency powers, and CPI-conditioned signaling—the system became increasingly reflexive. Forecasts influenced behavior, behavior altered transmission channels, and the assumptions underlying the forecasts deteriorated in real time.

This is also where Goodhart’s Law becomes relevant. Once CPI evolved into a political metric of credibility, policies increasingly targeted the appearance of price stability while structural imbalances accumulated elsewhere in the system. Statistical stability increasingly masked mounting financial and economic fragility.

The recent oil shock exposed how vulnerable this framework had become. 

Higher oil and electricity costs did not merely raise transport expenses. 

They cascaded throughout the economy by: 

• weakening household cash flow,
• compressing corporate margins,
• increasing dependence on consumer credit,
• and intensifying financing stress across sectors. 

Policymakers increasingly responded through: 

• subsidies,
• price suppression,
• emergency powers,
• regulatory accommodation,
• and politically mediated financing mechanisms. 

But intervention does not eliminate scarcity or losses. 

It merely redistributes them across balance sheets. 

And much of that redistribution increasingly lands on: 

• banks,
• consumers,
• currency markets,
• and sovereign financing channels. 

This is why the EO-110 framework matters beyond energy policy. 

Once emergency intervention becomes normalized, financial systems gradually evolve toward permanent crisis management layered on top of earlier pandemic-era accommodation. 

Banks then cease functioning purely as market intermediaries. 

They increasingly become quasi-fiscal transmission mechanisms for stabilizing politically sensitive sectors and sustaining nominal demand. 

If inflation forecasting failed because intervention distorted price signals and altered transmission mechanisms, then the same critique increasingly applies to GDP interpretation itself. 

Again, macroeconomic models rely on assumptions of relatively stable relationships, functioning price signals, and coherent feedback mechanisms. But once policy intervention persistently reshapes incentives, suppresses market adjustments, and redirects capital flows, aggregate output statistics become progressively less reflective of underlying productive conditions. 

GDP then risks evolving from supposedly a “neutral and objective” measure of economic activity into a politically conditioned artifact of intervention-driven stabilization. 

XI. The Banking Contradiction: Why System Normalization Is a Mirage 

The contradiction facing the Philippine banking system is no longer merely financial. 

It is increasingly political, institutional, and macroeconomic. 

After years of liquidity support, sovereign absorption, and intervention-driven stabilization, policymakers increasingly face objectives that are difficult to reconcile simultaneously. 

Authorities want: 

• growth without recession,
• lower inflation without adjustment costs,
• currency stability without external rebalancing,
• rising public spending without disorderly debt repricing,
• and a resilient banking system without materially tighter financial conditions.

But these objectives increasingly conflict. 

Containing inflation requires tighter liquidity conditions. 

Yet tighter liquidity risks slowing credit growth, exposing weaker borrowers, and amplifying stress in already leveraged sectors. 

Allowing yields to rise restores market pricing. 

But higher yields increase government financing costs while simultaneously eroding the value of bank-held sovereign securities. 

Supporting the peso may stabilize inflation expectations. 

But it also tightens financial conditions in an economy already dependent on credit expansion.

Meanwhile, renewed liquidity accommodation preserves short-term stability but reinforces inflation persistence and sovereign dependence.

The complexity of the feedback loops escalates. 

This is the banking contradiction of stagflation: 

the policy required to resolve one imbalance increasingly intensifies another. 

The Philippine banking system sits at the center of these tensions because it has become deeply embedded in: 

• sovereign financing,
• household leverage,
• liquidity transmission,
• and policy stabilization itself.

This is what distinguishes the current environment from a conventional credit cycle.

In normal downturns, banks primarily absorb credit losses.

Under stagflation, banks become transmission mechanisms for multiple overlapping pressures: 

• inflation,
• currency weakness,
• fiscal dependence,
• bond repricing,
• and slowing real activity.

The result is not necessarily immediate instability.

The greater risk is policy paralysis driven by structural contradiction. 

Authorities increasingly rely on path dependent responses: 

• selective tightening,
• targeted relief,
• expanded public spending,
• liquidity support,
• moral suasion,
• shaping media narratives,
• accounting flexibility,
• and regulatory accommodation. 

But hybrid regimes rarely resolve underlying imbalances. 

They instead delay recognition while deepening structural dependence on future intervention. 

This is why “normalization” becomes progressively more difficult. 

The longer accommodation persists, the more balance sheets adapt to its presence. Imbalances accumulate. Risk becomes embedded in expectations. And even modest tightening can generate disproportionate stress.

That is the deeper trajectory of the current cycle. 

The question is no longer whether the banking system appears stable today. 

The question is whether it can reduce its dependence on a framework of continual accommodation, subsidy, and intervention—or whether that dependence eventually defines the limits of the system through disorderly adjustment. 

XII. Conclusion: Accommodation Without Resolution Redux 

The Philippine banking system is not facing an immediate crisis (yet). 

Headline capitalization remains intact. Liquidity has stabilized temporarily. Regulatory ratios still signal resilience. 

But stagflation rarely begins through sudden collapse. 

More often, fragility accumulates gradually beneath the surface, exacerbating existing imbalances while policy intervention delays recognition. 

This is increasingly the pattern now emerging. 

Rising sovereign dependence, widening savings deficiencies, credit-financed malinvestments, peso weakness, bond-market repricing, and slowing real growth are converging on the same balance sheets policymakers increasingly rely upon to sustain stability.

The contradiction is difficult to escape. 

Banks are expected to finance fiscal expansion, absorb duration risk, support credit growth, and remain resilient—all while inflation, external fragility, and political intervention steadily distort the price signals that normally discipline risk.

The danger is not merely weaker profitability or rising bad loans.

The greater risk is a system that becomes progressively dependent on continual accommodation simply to preserve the appearance of stability.

More concerning still is the INTENSIFYING POLITICIZATION of the industry as it is increasingly mobilized to serve the deepening financing needs of the state.

That is the deeper meaning of the current cycle.

The issue is no longer whether the banking system appears stable today.

The issue is whether the foundations sustaining that stability are becoming increasingly fragile beneath the surface.

The Philippine banking system may not yet be in crisis.

But it is increasingly operating under siege—and drifting toward one. 

___

References

1 Stagflation Is Already Here—Emergency Policies Are Now Entrenching It 

2 Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook 

3 The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3) 

4 Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4) 

5 Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression 

Seed Article:

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention