“War,” Mises observed, “is harmful, not only to the conquered but to the conqueror. Society has arisen out of the works of peace; the essence of society is peacemaking. Peace and not war is the father of all things. Only economic action has created the wealth around us; labor, not the profession of arms, brings happiness. Peace builds; war destroys.”—Llewellyn H. Rockwell Jr
In this issue
The Php3.9 Trillion Savings-Investment Gap: How the
Middle East Conflict Exposed the Philippines’ Economic Fragility
I. Geopolitical Shock: Philippine Markets React
II. February Yield Curve: Fragility Already Forming
III. What the Yield Curve Reflects: The Consumption of
Savings
IV. The Defective Anchor: Savings Is a Residual of GDP
V. The Php3.9 Trillion Gap: Structural, Not Cyclical
VI. Inflation and the Erosion of Real Savings
VII. Fiscal Absorption, and Budget Excess
VIII. Record Public Debt Magnifies the Crowding Out
IX. Micro Signals: Consumption Recalibration (Marks and
Spencer, SM Foot Traffic)
X. BSP Increases Cash Withdrawal Limits and Financial
Stability
XI. External Shock Transmission: When Geopolitics Meets
Structural Fragility
A. Energy and Food Inflation
B. Industrial Supply Chain Disruptions
C. OFWs, Tourism and Service Sector
Exposure
D. Financial Transmission and Emerging
Market Stress
XII. Strategic Vulnerability: Drift to a War Economy, Thucydides
Trap Geopolitics
XIII. Systemic Shock Scenario
XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World
The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility
Rising oil prices, supply chain risks, and widening
external imbalances are revealing deeper structural weaknesses in savings,
fiscal dynamics, and financial markets.
The Php3.9 Trillion Savings-Investment Gap: How the
Middle East Conflict Exposed the Philippines’ Economic Fragility
I. Geopolitical Shock: Philippine Markets React
Last week we wrote:
For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks.
The escalation of the U.S.–Israel–Iran conflict triggered a sharp repricing across Philippine financial markets.
Figure 1
- The USD–Philippine peso reclaimed the 59 level, the BSP’s Maginot Line.
- Despite rescue pumps centered on International Container Terminal Services Inc. (ICTSI), the primary equity benchmark, the PSEi 30, fell by 4.4%. (Figure 1, topmost pane)
- Worse, yields of the Philippine Treasury curve rose across maturities, drastically shifting direction from bullish to bearish steepening, reflecting a broad rise in rates. (Figure 1 , middle image)
However, the adjustment was not uniform across maturities.
Yields in the belly of the curve — particularly in the five-to-ten-year segment — rose the most, suggesting that investors were reassessing medium-term inflation and fiscal risks rather than short-term policy expectations. Such a pattern is consistent with a rise in the term premium, where investors demand additional compensation for holding duration amid heightened uncertainty.
Relative pricing reinforces this interpretation.
Philippine ten-year yields have recently risen faster than their U.S. Treasury counterparts, widening the spread between the two benchmarks. If the move were purely a global risk-off adjustment, local yields would likely mirror U.S. Treasuries. (Figure 1, lowest graph)
Instead, the divergence suggests that global shocks are interacting with domestic vulnerabilities already embedded in the curve — including rising sovereign absorption of liquidity and persistent fiscal supply.
In that sense, the geopolitical shock did not create the steepening dynamic; it exposed and accelerated pressures that were already forming within the Philippine yield structure.
The Middle East conflict may therefore reveal something
deeper about the Philippine economic development model — particularly the
country’s persistent savings-investment gap.
II. February Yield Curve: Fragility Already Forming
Prior to the outbreak of the Middle East conflict, the
Philippine yield curve in February already exhibited subtle signs of structural
tension.
Figure 2
The curve experienced bullish steepening: short-dated yields fell sharply as markets priced policy relief, while the belly of the curve declined more modestly. Yet the longest maturities — particularly the 20- to 25-year segment — failed to rally alongside the front end. (Figure 2, topmost window)
This divergence reflected optimism over near-term liquidity conditions but lingering skepticism over long-horizon risks.
Investors appeared willing to price policy accommodation in the short run, while still demanding continued compensation for holding ultra-long duration amid persistent fiscal issuance and the possibility that easing could eventually translate into renewed inflation pressure.
In short, the curve suggested that markets were optimistic about near-term liquidity but cautious about long-term stability.
That skepticism would later prove meaningful once
geopolitical risks intensified.
III. What the Yield Curve Reflects: The Consumption of Savings
The yield curve’s structure is ultimately a reflection of accumulating imbalances arising from the persistent consumption of savings.
When investment chronically exceeds domestic savings, the difference must be financed through borrowing, foreign capital inflows, or monetary accommodation (financial repression/inflation tax).
As this imbalance widens, the bond market begins to reflect the underlying funding pressure through changes in yield levels and curve structure.
In such an environment, the yield curve becomes more than a signal of growth expectations. It becomes a barometer of the economy’s capacity to finance its own investment demand.
The Philippine curve’s evolving shape therefore hints at a deeper structural issue: the scarcity of domestic savings relative to the scale of investment being pursued.
IV. The Defective Anchor: Savings Is a Residual of GDP
The Philippines reported a record savings-investment gap in 2025. Gross domestic savings reached Php2.35 trillion, equivalent to 8.4% of GDP, while investment reached Php 6.25 trillion, or 22.3% of GDP, resulting in a Php 3.9 trillion gap, about 5.4% higher than in 2024. (Figure 2, lower chart)
However, the savings figure itself is derived from the GDP framework.
Gross domestic savings is not directly observed thrift. Instead, it is calculated as:
GDP – Final Consumption Expenditure
This means the savings figure is fundamentally an accounting residual, not a direct measurement of household or corporate saving behavior.
Several implications follow:
- If GDP is overstated, savings is automatically overstated.
- If government spending inflates GDP, savings
mechanically rises — even if households are financially strained.
- If inflation boosts nominal GDP, “savings” increases on paper without improving real financial capacity.
- A GDP powered by debt expansion does not necessarily entail rising savings, but rather extended leveraging.
An 8.4% savings rate does not necessarily mean households saved more. It means the national income accounting identity indicates that they did.
Figure 3
In a deficit-driven economy where public spending is elevated, GDP itself can be propped up by the very borrowing used to finance the savings-investment gap. This makes the savings measure partially endogenous to debt expansion.
In 2025, the increase in nominal borrowing exceeded growth of nominal and real GDP! (Figure 3, topmost visual)
In effect, the economy is using a debt-inflated denominator to measure the shortage of savings required to fund debt-driven investment.
That circularity matters.
V. The Php3.9 Trillion Gap: Structural, Not Cyclical
The magnitude of the imbalance becomes clearer when the
savings-investment gap is examined directly.
In 2025:
- Savings: Php2.35 trillion
- Investment: Php6.25 trillion
- Gap: –Php3.90 trillion
This represents the largest gap in recent years and marks a continuation of a widening trend since 2022.
Such an imbalance is not merely a statistical curiosity.
It represents the scale of financing required from outside the domestic savings
pool to sustain the country’s investment program.
When investment persistently exceeds domestic savings, the difference must be financed through:
- external capital inflows
- increased public or private borrowing
- monetary accommodation
- or some combination of all three.
There is no automatic equilibrium mechanism that closes
such a gap organically. The imbalance can narrow only through:
- higher real savings, lower investment,
- or a cyclical downturn that compresses demand.
Yet the Philippine economy is attempting to sustain an investment rate exceeding 22 percent of GDP while maintaining a single-digit domestic savings rate.
Maintaining this configuration requires continuous financial intermediation and leverage expansion.
In effect, investment persists even when the domestic
financial base capable of supporting it remains limited.
VI. Inflation and the Erosion of Real Savings
Inflation dynamics further complicate the savings constraint.
Even moderate price increases reduce the real purchasing power of the savings that households and firms are able to accumulate. When inflation is concentrated in essential expenditures—such as food, energy, and housing—the erosion of savings becomes particularly pronounced among lower- and middle-income households.
While headline inflation may remain within official target ranges, its composition and distribution matters. Food inflation and other essential expenditures absorb a large share of household income, limiting the ability of households to build financial buffers.
For instance, February data show that the Food CPI for the bottom 30% jumped from 0.6% to 2.2%, signaling rising pressure on the consumption basket of poorer households and foreshadowing renewed stress in hunger and self-rated poverty indicators. (Figure 3, middle diagram)
Which raises a simple question: whatever happened to the nationwide Php20 rice rollout and the MSRP regime? Or has the law of diminishing returns quietly reasserted itself? (Figure 3, lowest chart)
These pressures are emerging even before any potential spillovers from the evolving Middle East conflict.
This means that even if nominal savings appear stable within national accounts, the real savings available to finance domestic investment may be shrinking.
In such an environment, the effective savings-investment gap becomes wider than what the
nominal accounting framework suggests.
Figure 4
In any case, the Bangko Sentral ng Pilipinas’ easing
cycle has contributed to the recent acceleration in CPI, reinforcing the
broader inflationary cycle. If current liquidity trends persist, these dynamics may generate a third wave of
inflation cycle (as we continually forecast), which would continue to erode
the real value of household savings. (Figure 4, topmost diagram)
VII. Fiscal Absorption, and Budget Excess
Fiscal dynamics have increasingly played a central role in bridging the savings-investment imbalance.
Large public investment programs and persistent fiscal deficits require sustained government borrowing. As sovereign issuance expands, the state absorbs a growing share of the available liquidity within the domestic financial system.
Another dimension of fiscal dynamics involves the difference between released budget allocations and actual spending disbursements.
When government agencies receive funding releases ahead of actual project implementation, liquidity enters the financial system before real economic activity materializes. This can temporarily ease financial conditions even as underlying fiscal supply continues to accumulate.
The result is a financial environment where liquidity conditions may appear accommodative in the short run while structural funding pressures continue to build beneath the surface.
Actual 2025 spending hit Php6.49T, exceeding the Php 6.33T enacted GAA—the second-largest overrun since 2021 and the seventh straight year of excess. (Figure 4, middle graph)
Persistent post-enactment augmentation weakens Congress’s budget authority and shifts fiscal discretion to the executive.
Meanwhile, the Bureau of the Treasury reported a Php1.577 trillion fiscal deficit in 2025—third widest in history, as government expenditures reached a record Php6.03 trillion while revenues totaled Php4.453 trillion. (Figure 4, lowest chart)
The Php 6.49 trillion represents total allotments
released—spending authority exercised during the year—while the Php6.03
trillion reflects actual cash disbursements recorded by Treasury. Allotments
and cash outflows do not perfectly align due to timing lags, multi-year
obligations, and accounting adjustments. Both figures are valid, but they
measure different stages of fiscal execution.
VIII. Record Public Debt Magnifies the Crowding Out
Public debt dynamics reinforce this absorption effect.
Figure 5
As fiscal deficits accumulate, the government must continuously refinance maturing obligations while issuing additional securities to fund new borrowing requirements. This process steadily expands the sovereign’s claim on domestic and external savings pools. (Figure 5, topmost window)
Recent data from the Bureau of the Treasury show that national government debt continued to climb in January 2026 to reach a record Php 18.134 trillion, reflecting the cumulative impact of sustained fiscal deficits, elevated interest costs, and ongoing borrowing to finance development programs. The rate of debt growth has steadily been rising since 2023. (Figure 5, middle image)
While debt expansion can support public investment in the near term, it simultaneously increases the financial system’s exposure to sovereign credit and interest-rate risk.
Rising debt levels therefore deepen the interaction between fiscal policy and domestic liquidity conditions. As government securities issuance expands, banks, pension funds, and institutional investors allocate a larger share of their portfolios to sovereign instruments, potentially crowding out private sector credit over time
The Bank’s net claims on the central government spiked to a record Php 6.135 trillion in December 2025—equivalent to about 35% of outstanding government debt now effectively monetized by the banking system. (Figure 5, lowest chart)
Nonetheless, treasury
markets often register these pressures first, particularly through changes in
the term structure of interest rates.
IX. Micro Signals: Consumption Recalibration (Marks and
Spencer, SM Foot Traffic)
Macroeconomic imbalances often surface first in microeconomic behavior.
Recent developments in Philippine retail illustrate subtle shifts in consumption patterns.
The recalibration of operations by international retailers such as Marks & Spencer (M&S) suggests increasing sensitivity of discretionary spending to economic conditions.
Premium and mid-tier consumption categories are typically among the earliest segments to reflect shifts in household purchasing power. When real income growth slows or financial buffers weaken, consumers tend to prioritize essential spending while reducing discretionary purchases.
The cautionary signal from M&S is reinforced by declining mall activity reported by SM Prime Holdings, with foot traffic in SM Supermalls reportedly falling by roughly 26 percent (from a record 1.9 billion visitors in 2024 to 1.4 billion in 2025. This coincides with a moderation in per-capita GDP growth, which slowed to 2.9 percent in the fourth quarter and 3.7 percent for 2025.
Supermarket
operators have likewise reported weaker-than-expected demand, alongside
signs of customer migration toward lower-priced distributors and
wholesalers. These developments have also been attributed partly to the impact of recent minimum-wage adjustments, which may be affecting
both consumer purchasing patterns and retail cost structures.
Figure 6
At the same time, the recent softness in per-capita household income growth has been accompanied by plateauing credit expansion among universal banks and a gradual easing in employment growth. (Figure 6, upper and lower graphs)
Taken together, these indicators point to deepening signs of demand-side fatigue and raise the possibility of emerging stagflationary pressures.
The pattern suggests sustained compression in consumption velocity and discretionary elasticity—conditions under which portfolio recalibration, such as M&S’s operational adjustments, becomes economically rational.
Such responses are consistent with an economic environment where investment remains elevated while fiscal expansion absorbs a significant share of domestic resources (crowding out effect). In this context, increasingly leveraged balance sheets may constrain income generation and limit the capacity for household savings formation.
In this sense, retail recalibration may represent a microeconomic reflection of the broader macroeconomic imbalance.
X. BSP Increases Cash Withdrawal Limits and Financial Stability
As the savings–investment imbalance widens, maintaining financial stability increasingly depends on liquidity management. The Bangko Sentral ng Pilipinas’ increase of the AML cash-withdrawal trigger from Php500,000 to Php1 million illustrates how regulatory measures—aimed at curbing corruption—interact with liquidity conditions in a system where domestic savings alone cannot fully support investment.
When access to deposits is subject to thresholds or enhanced monitoring, behavior adjusts. Firms stagger transactions, households hoard cash, and informal channels gain marginal attractiveness. The earlier Php 500,000 threshold already intersected routine commercial flows, so even small frictions can influence normal business activity. Raising the trigger reflects calibration, signaling awareness that liquidity behavior matters for stability.
External shocks further expose structural constraints. Rising energy prices or currency pressures reveal the fragility of a growth model reliant on debt-financed investment amid limited domestic savings. In this environment, regulatory calibration becomes a recurring feature of financial governance, shaping behavior at the margins and influencing the circulation of money in the economy.
Legal definitions may distinguish between “capital controls” and “AML thresholds,” but economic agents respond to function, not classification. If large withdrawals attract friction, delay, or reputational risk, behavior adjusts. Firms stagger transactions. Households pre‑emptively hoard cash. Informal channels gain marginal attractiveness. Velocity softens at the edges. Such policy creates forced trade‑offs in the use of private property.
Freedom conditioned by compliance is still freedom altered. In functional terms, the BSP withdrawal cap operates as a form of capital control—an indirect restraint on liquidity mobility, justified under the banner of anti‑money laundering.
The label may differ, but the effect is the same: liquidity is managed not only by market
forces but by regulatory thresholds that redefine how money circulates.
XI. External Shock Transmission: When Geopolitics Meets Structural Fragility
The Middle East conflict introduces several transmission channels that could amplify the Philippines’ already fragile savings-investment balance.
Note: In an increasingly complex and interconnected world, the factors outlined above represent only the “seen” or visible channels and their immediate second-order effects. Should the current disorder persist, the transmission mechanisms could extend far beyond this list, propagating through indirect and more diffuse channels that would require a far more exhaustive examination. Even so, the initial escalation of the Middle East conflict is already significant enough to expose underlying imbalances—both domestically and across the global economy.
A. Energy and Food Inflation
The Philippines remains heavily dependent on imported energy. A sustained rise in oil prices resulting from instability in the Middle East could increase transportation and production costs across the economy.
Higher energy prices often translate into food inflation, as logistics, fertilizer costs, and agricultural inputs become more expensive. Because food accounts for a significant share of household expenditure (34.78% in BSP/PSA CPI basket), rising prices reduce the ability of households to accumulate savings.
In an economy already characterized by limited domestic savings, such inflationary pressures further weaken the financial base—via weakened savings structure—needed to support investment.
B. Industrial Supply Chain Disruptions
A broader regional conflict could also disrupt global supply chains.
Industrial inputs, shipping routes, and energy supply lines connecting Asia, Europe, and the Middle East could face delays or increased insurance costs. These disruptions would raise production costs and freight rates, placing additional pressure on import-dependent economies like the Philippines.
Higher freight costs translate directly into higher
import prices, reinforcing inflationary pressures and worsening the country’s
trade balance.
C. OFWs, Tourism and Service Sector Exposure
Geopolitical instability can affect the Philippines through multiple channels, including overseas Filipino workers (OFWs), travel flows, and tourism confidence.
Figure 7
The country’s reliance on remittances, particularly from the Middle East, creates potential vulnerability: any disruption to regional labor markets could reduce household income and weaken domestic consumption.
OFW personal and cash remittances grew 3.3% in 2025, marginally above 3% in 2024, but both continue a gradual slowdown in growth since 2010, consistent with diminishing returns. Nevertheless, nominal inflows reached record levels of $39.6 billion (personal) and $35.6 billion (cash). (Figure 7, topmost pane)
Even though the Philippines is not near the conflict zone, global travel demand often declines during periods of geopolitical uncertainty.
A slowdown in tourism receipts would reduce foreign exchange inflows and weaken service-sector revenues.
Combined with rising energy import costs, lower remittances and tourism earnings could widen the current account deficit, exposing the economy to external shocks.
After a significant statistical revision, foreign tourist arrivals shifted from contraction to growth. Foreign arrivals rose 9.2% in 2025, up from 8.7% in 2024, while total arrivals including overseas Filipinos increased 9%, slightly below the 9.2% growth recorded in 2024. Gross arrivals reached 5.9 million, exceeding 2016 levels. (Figure 7, middle graph)
The Philippines is considered particularly vulnerable to oil price shocks due to its deficit channel, highlighting how geopolitical events can amplify existing structural imbalances in income, savings, and external liquidity.
Philippine Balance of
Payments BoP deficits have accumulated since 2014, broadly coinciding with
the increasing share of government spending in GDP. The pandemic recession
amplified this trend. In 2025, the BoP recorded a $5.6 billion deficit, the
second-largest shortfall since 2022. (Figure 7, lowest chart)
D. Financial Transmission and Emerging Market Stress
Financial markets represent another channel through which geopolitical shocks propagate.
Periods of global uncertainty often push investors toward safe-haven assets such as U.S. Treasuries, US dollar and gold. For emerging markets with structural savings deficits, this shift can lead to tighter financial conditions.
Rising global yields and capital outflows can trigger margin calls, balance sheet adjustments, and risk repricing across emerging market debt markets.
Countries relying heavily on external financing to
sustain investment programs may therefore face increasing borrowing costs or
reduced access to capital.
XII. Strategic Vulnerability: Drift to a War Economy, Thucydides
Trap Geopolitics
The Philippines’ strategic alignment with the United States also introduces geopolitical considerations.
The presence of nine U.S. military facilities across several Philippine locations under the Enhanced Defense Cooperation Agreement places the country within the broader regional security architecture of the United States.
In the event that a regional conflict expands beyond the Middle East into a broader geopolitical confrontation, these installations could increase the Philippines’ exposure to geopolitical risk and economic disruption.
Since the outbreak of the U.S.–Israel–Iran war, U.S. bases in the Middle East have
repeatedly become targets of attacks or retaliatory strikes—underscoring how
overseas installations can act as magnets for escalation during conflict.
Figure 8
Since the outbreak of the US–Israel–Iran conflict, energy markets appear to be pricing a more prolonged confrontation. Both Brent Crude and West Texas Intermediate have climbed above $90 per barrel (as of March 6th), lifting coal and European natural gas prices and signaling expectations of sustained disruption rather than a short-lived shock.
The energy price surge suggests that Iran retains the ability to impose meaningful costs on United States and Israel operations—contrary to earlier mainstream assumptions of a swift resolution.
Combined with Donald Trump’s demand for Iran’s “unconditional surrender,” the probability of a protracted confrontation rises, with potentially serious consequences for global markets.
More broadly, the conflict may reflect a deeper structural shift toward the militarization (Bushido/Sparta) of the global economy (previously discussed)—a transition toward what could be described as a modern war economy.
Intensifying strategic rivalry between major powers increasingly resembles the dynamics described in the Thucydides Trap, where rising and established powers enter periods of heightened confrontation.
In this context, several entwined structural forces may be reinforcing the escalation dynamic:
- the neoconservatives, dogmatic practitioners of strategic hegemonic doctrines such as the Wolfowitz Doctrine,
- the deepening influence of the military-industrial complex first warned about by Dwight D. Eisenhower,
- the geopolitical influence of lobbying organizations such as American Israel Public Affairs Committee, to promote Greater Israel and
- the role of ultra-loose monetary policy by the Federal Reserve in facilitating large-scale deficit spending, funding military expenditures.
Taken together, these forces—what might be described metaphorically as the “four horsemen” of the deepening war economy—risk reinforcing a cycle in which expanding military spending, protectionism, and the weaponization of finance and energy reshape the global economic order.
If sustained, such dynamics could crowd out productive investment, deepen geopolitical fragmentation, and increase the probability that regional conflicts evolve into broader geopolitical confrontation—World War III—alongside rising risks of financial instability.
XIII. Systemic Shock Scenario
Taken together, these channels illustrate how a regional conflict could evolve into a broader systemic shock.
Energy markets, global supply chains, financial markets, remittances and tourism flows are deeply interconnected. A prolonged conflict could therefore produce cascading effects across trade, inflation, capital flows, and financial stability.
For economies with strong domestic savings buffers, such shocks can often be absorbed through internal financing capacity.
For economies operating with a persistent savings-investment gap, however, external disturbances can rapidly translate into currency pressure, rising yields, and financial volatility.
The Middle East conflict did not create the Philippines’ structural vulnerabilities.
But by simultaneously pressuring energy prices, supply chains, capital flows, and financial markets, it may reveal the limits of an economic model that relies on debt-financed investment amid chronically weak domestic savings.
XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World
The escalation of the Middle East conflict ultimately highlights a deeper structural reality confronting the Philippine economy.
Statistics record the past, but the savings–investment gap is inherently forward-looking. Investment decisions occur ex-ante, while national accounts measure the results only after the fact.
The Philippines is attempting to sustain an IDEOLOGICAL development premise in which investment spending remains substantially above the domestic savings rate the economy generates. The resulting imbalance must therefore be continuously bridged through higher taxation, expanding public debt (and thus higher future taxes), financial repression through inflation, or reliance on external capital flows.
Such a structure can function during periods of easy global liquidity and relative geopolitical stability. But it becomes increasingly fragile when conditions shift—whether through rising energy prices, supply chain disruptions, tightening financial conditions, or other manifestations of unsustainable economic dynamics (external or internal).
In that environment, the true constraint on economic expansion is no longer the willingness to invest, but the availability of real savings capable of financing that investment without destabilizing the financial system.
The Middle East conflict did not create this imbalance.
It merely revealed how narrow the Philippines’ margin of financial stability may already be.
_____
Selected References
Prudent Investor Newsletters, Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks, Substack March 01, 2026
Prudent Investor Newsletters, PSE
Divergence Confirmed — The September Breakout That Redefined Philippine Mining
in the Age of Fiat Disorder Substack October 08, 2025
