A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.

 

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

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

In this issue 

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

I. BSP Denies Currency Manipulation Amid Trade Talks

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

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

IV. Market Signals Point to Implicit Bilateral Deals

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

VI Gross International Reserves Tell a Different Story

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

VIII. Yield Spreads and Market Disruptions Signal Intervention

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

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

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

I. BSP Denies Currency Manipulation Amid Trade Talks 

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

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

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

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

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

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

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

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

Figure 1 

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

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

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

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

IV. Market Signals Point to Implicit Bilateral Deals 

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

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

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

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

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

VI Gross International Reserves Tell a Different Story 

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

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

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

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

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

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

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

Figure 2 

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

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

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

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

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

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

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

Figure 3

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

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

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

VIII. Yield Spreads and Market Disruptions Signal Intervention 

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

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

Figure 4

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

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

Figure 5 

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

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

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

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

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

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

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

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

Is the Philippines on the Brink of a 2025 Fiscal Shock?

 

You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting). Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying—Ray Dalio

In this issue

Is the Philippines on the Brink of a 2025 Fiscal Shock?

I. A Brewing Fiscal Storm?

II. April 2025 vs April 2024: A Sharp Deterioration

III. Four-Month Performance: Weak Revenue Momentum

IV. Weak Revenue Despite Loose Conditions: A Structural Problem?

V. Budget Math: A Deficit Blowout in the Making?

VI. Economic Fragility Threatens Further Revenue Weakness

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

B. External Trade: Consumer Import Growth Sharply Slows

C. Headline and Core CPI: More Evidence of Demand Weakness

D. Labor Market Deterioration, Hidden Labor Market Realities

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

B. Debt Payment Dynamics

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition

X. Crowding Out Effect and Interest Rate Pressures

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

XIII. Conclusion: Fiscal Shock Watch 2025 

Is the Philippines on the Brink of a 2025 Fiscal Shock? 

April's budget surplus masks a deeper fiscal crisis brewing beneath record-high deficits and weakening revenue collection

I. A Brewing Fiscal Storm? 

Is the Philippines teetering on the brink of a fiscal shock?  We are about to find out after eight months of government data. 

The Bureau of the Treasury’s April 2025 cash operations report confirms our suspicion that the government is struggling to meet critical fiscal targets, which should raise concerns about economic stability. 

As noted in early May: "A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track." (Prudent Investor, May 2025) 

The Inquirer.net reported on May 28, 2025: "The national government recorded a budget surplus of P67.3 billion in April, surging by 57.51 percent or P24.6 billion from a year ago, as tax revenues posted stronger growth and spending slowed for the month. However, for the January to April period, the cumulative budget deficit surged by 78.98 percent to P411.5 billion, as public spending rose by 13.57 percent to support economic activity and the priority programs of the Marcos administration." 

Media narratives either echoed the official line on tax revenue strength or highlighted spending restraint as causes for April’s surplus. But both perspectives overlook a critical detail: April’s surplus aligns not just with the 2023 VAT filing shift to a quarterly basis (previously discussed) but—more importantly—with the "annual tax filing deadline"—a period typically associated with a revenue spike. Yet, even this failed to close the fiscal gap. 

Additionally, the record-high deficits in Q1, persisting into the first four months, have gone largely unaddressed in mainstream discussions. 

To cut to the chase: April data signals a further weakening in the revenue base—right in the face of unrelenting public expenditure, pushing the deficit to historic levels. 

Let’s delve into the details to understand the scope of this fiscal challenge. 

II. April 2025 vs April 2024: A Sharp Deterioration 

In April 2025: 

• Revenues fell 2.82%
• Tax revenues grew 7.84%
• Non-tax revenues plunged 68.08%
• Bureau of Internal Revenue (BIR) growth of 11.1% boosted tax revenues
• Bureau of Customs (BoC) 7.5% declined, which weighed on overall performance

Compare that to April 2024: 

• Revenues soared 21.9%
• Tax revenues surged 13.9%
• Non-tax revenues rocketed 114%
• Tax revenues were anchored by BIR's 12.65% growth and the BoC delivered a strong 19.5%.

Clearly, April 2025 showed a sharp drop in performance despite the same structural advantages related to annual filings.

Figure 1       

The nominal (peso) figures show revenue collections falling significantly short of April 2024's all-time high. (Figure 1, topmost window)

Relative to the VAT’s quarterly cycle, note that the combined January and April 2025 surpluses (Php 135.66 billion) exceeded 2024’s (Php 130.7 billion) by just 3.8%—barely moving the needle against the Q1 fiscal gap. (Figure 1, second to the highest image) 

III. Four-Month Performance: Weak Revenue Momentum 

For January to April 2025: 

• Revenues grew a meager 3.3%.
• Tax revenues rose 11.5%, while non-tax revenues collapsed 51.94%.
• The BIR and BoC posted 14.5% and 2.16% growth, respectively.

In contrast, the first four months of 2024 showed:

• Revenues up 16.8%.
• Tax revenues up 13.22%.
• Non-tax revenues up 48.81%.
• The BIR and BoC grew by 15.35% and 6.47%, respectively. 

Clearly, April 2025 didn’t just underperform—it dragged down the already fragile broader four-month revenue trend. (Figure 1, second to the lowest visual) 

IV. Weak Revenue Despite Loose Conditions: A Structural Problem? 

Critically, Q1’s collection performance coincided with the full effects of the BSP’s first easing cycle in 2024, while April began reflecting partial effects of the second phase. 

Additionally, macro conditions were supportive:

• Bank credit growth was strong.
• Labor market conditions were reported as near full employment.
• Inflation slowed.

Universal-commercial bank loans jumped 11.85% in April to a record Php 12.931 trillion. Yet, public revenues stalled. (Figure 1, lowest graph) 

In short, despite historically loose financial conditions, the government has already been experiencing collection issues—a potential symptom of diminishing returns from BSP’s easy-money regime.

This suggests that further monetary stimulus yields progressively smaller positive impacts on revenue generation or economic growth, potentially reflecting inefficiencies in credit transmission due to mounting balance sheet problems. 

Which leads us to the trillion-peso question: What happens when financial conditions tighten? 

V. Budget Math: A Deficit Blowout in the Making?

From January to April, total revenues reached Php 1.520 trillion. Annualized, that projects Php 4.561 trillion—assuming average monthly intake of Php 380.06 billion. 

Compare that to the 2025 enacted budget of Php 6.326 trillion—already a base case considering six straight years of overspending. Authorities have already disbursed Php 1.932 trillion, implying a remaining monthly average of Php 549.28 billion. 

Bluntly put: At the current pace, 2025 could register a deficit of Php 1.765 trillion—5.7% higher than 2021’s all-time high of Php 1.67 trillion!

The key difference? 2021’s deficit was a deliberate fiscal stabilizer—alongside the BSP's unprecedented monetary and regulatory measures—in response to the pandemic. 

In 2025, no downturn has yet emerged—but the deficit itself threatens to trigger one.

VI. Economic Fragility Threatens Further Revenue Weakness 

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

Figure 2

Since its peak in July 2024, manufacturing loans have been decelerating. March growth was just 2%. However, PPI rose only 0.06% in April YoY—barely moving. (Figure 2, topmost pane)

Though manufacturing volume/value both rose 4.2–4.3% inApril, this likely reflected distortions from new Trump tariffs effective that month.

The S&P PMI index showed a similar spike to 53 in April but slumped to 50 in May. (Figure 2, second to the highest chart)

B. External Trade: Consumer Import Growth Sharply Slows

April imports fell 7.2%, while exports rose 7%, compressing the trade deficit by 26%. (Figure 2, second to the lowest diagram)

But consumer goods imports slumped from 25.8% in March to just 2.83% in April. (Figure 2, lowest graph)

Agri-based products—led by coconut and sugar—boosted exports.

C. Headline and Core CPI: More Evidence of Demand Weakness

Headline CPI slipped from 1.4% in April to 1.3% in May, mainly due to quasi-price controls known as Maximum Suggested Retail Prices (MSRP) on rice and pork. The government also began rolling out Php 20 rice subsidies in select areas, distributing them among targeted groups.

Figure 3

However, Core CPI (non-food and non-energy) steadied at 2.2% for a third straight month, backed by a base-forming month-over-month rate of 0.16%—marking a second consecutive month. A soft CORE CPI reflects underlying weakness in demand. (Figure 3, topmost image)

D. Labor Market Deterioration, Hidden Labor Market Realities

Labor data reveals further vulnerabilities. The unemployment rate rose from 3.9% in March to 4.1% in April, but this excludes an estimated 24 million “functionally illiterate workers” (47% of the labor force or 30% of the population aged 15 and above). Many of these workers are likely employed in the informal sector or MSMEs (67% of employment in 2023, per DTI) or are underemployed, part-time, or not in the labor force. 

The “not in the labor force” population, defined by the PSA as those not seeking work due to reasons like housekeeping or schooling or permanent disability, has risen since November 2022, potentially masking the true unemployment rate and raises questions about the true extent of labor underutilization. (Figure 3, middle chart) 

The correlation between universal-commercial bank consumer salary loans and CPI trend since 2021 highlights consumer strain, further eroding aggregate demand. (Figure 3, lowest diagram) 

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain 

Amidst all of this, we must ask: what has happened to "aggregate demand," particularly consumer demand? If consumers have shown worsening strains at the start of Q2, its continuity bodes ill for GDP growth and could likely be expressed in potential shortfalls in tax collections. 

So how will the government attempt to keep the GDP afloat? Given their top-down bias, the mechanical recourse would be to front-load public spending, thereby heightening the risks of a fiscal deficit blowout! 

Naturally, because the government is not a wealth generator but rather a redistributor and consumer, someone has to finance that swelling deficit. That "someone" is the individuals in the wealth-generating productive private sector. 

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

Figure 4 

With the first four-month deficit at a record high of Php 411.5 billion, authorities raised Php 155.61 billion in April, leading to a 190% spike in financing of Php 799.73 billion in 2025. This effectively reversed the three-year (2021-2024) decline previously hailed by mainstream experts as prudential management. (Figure 4, topmost window)

The financing surge increased BTr's cash reserves to Php 1.205 trillion (Jan-Apr), though authorities held net cash reserves of only Php 188.9 billion in April. 

April's financing was mostly acquired through domestic issuance.

B. Debt Payment Dynamics 

April debt payments soared 73.72% to Php 280.898 billion, accruing to Php 622.921 billion in the first four months of 2025. (Figure 4, middle image) 

Total debt payments remained 45.7% below 2024's record levels. However, FX payments grew 17.3%, partly offsetting the 59.64% plunge in peso payments.

The FX share of debt servicing relative to the total has been rising since 2024. (Figure 4, lowest chart) 

The lag in payment data may be due to scheduling issues or information deliberately withheld for political reasons. 

While we find the preponderance of media announcements showing how debt payment has substantially slowed this year rather amusing, logic dictates that widening deficits will lead to a critical increase in debt that will have to be serviced over time. 

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition 

April debt hit a record Php 16.753 trillion. Thanks to a strong peso, FX-denominated loans fell 2.7% or Php 142.33 billion. 

Per Bureau of Treasury (BTr): "The reduction was primarily due to the P124.74 billion decrease in the peso value of external debt owing to peso appreciation." 

However, domestic debt grew 1.85% or Php 211 billion, resulting in a net increase of 0.41% or Php 68.690 billion. 

Reality Check: Philippine foreign debt did not actually shrink. The peso simply strengthened, lowering the debt's peso equivalent. Remember, FX liabilities still have to be repaid in dollars or other foreign currencies. In short, it's a revaluation trick—a statistical façade, not a real debt decrease. 

X. Crowding Out Effect and Interest Rate Pressures

Figure 5

In any case, the widening deficit, brought about by the mismatch between accelerating public spending and weakening revenue growth, underwrites the escalation of public debt. The rise in public debt has already been outpacing the growth trend of public spending, driven by the deficit and likely by amortization requirements. (Figure 5, topmost pane)

This escalating fiscal deficit means that competition for access to the public's diminishing savings will intensify, as government requirements will likely crowd out the domestic credit needs of banks and non-private sector firms, thereby putting pressure on interest rates. For businesses, this translates to higher borrowing costs and reduced access to credit, potentially stifling private sector investment and job creation. For ordinary citizens, it could mean higher interest rates on loans for homes, cars, or personal consumption. 

As an aside, the relentless rise in debt levels is not only a manifestation of the consequences of the government-BSP's "trickle-down" policies (debt-financed "savings-investment gap," "twin deficits," and "build and they will come" malinvestments); critically, they also signify the indirect ramifications of the Philippine social democratic system. In essence, this is what you have voted for! 

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing 

So, despite authorities' earnest attempts to push down the CPI—mainly via price controls or Maximum Suggested Retail Prices (MSRP) for rice and pork—to accommodate a desired easing cycle, T-bill rates have barely budged since 2022!  (Figure 5, middle chart) 

T-bills, the most sensitive to BSP's rate cuts, have remained unresponsive to April's CPI data! 

The widening spread between market (T-bills) and the CPI suggests that, aside from the crowding-out effect, Treasury markets view the present disinflation as "transitory," or they are hardly convinced of the integrity of the government's data. 

Consider this: The punditry consensus has been clamoring for lower rates on the back of a slumping CPI, but treasury dealers for their companies continue to price Treasuries as if the CPI remains inordinately high!

In short, the crowding out has rendered the government-BSP's easing cycle ineffective: Fiscal stimulus has hit a wall due to diminishing returns!

At worst, the mounting discrepancy could translate into increasing policy risks—or a potential blowback—that could be expressed through an inflation surge or a USD/PHP spike.

As seen in banks' balance sheets, this crowding out has led to a plunge in their liquidity positions (evidenced by falling cash-to-deposits and liquid assets-to-deposits ratios).

This increasing demand for public savings also applies to foreign exchange (FX) requirements. This means that to meet the economy's foreign exchange (FX) requirements and support the BSP's "soft peg" or foreign exchange policy, a surge in external debt can be expected. 

Evidently, public savings have not been sufficient. Authorities have increasingly relied on banks to finance public requirements via net claims on the central government (NCoCG), which have been rising in tandem with public debt. These assets have been siloed via banks' held-to-maturity (HTM) assets. The all-time high in public debt has been accompanied by a near-record NCoCG in April. (Figure 5, lowest diagram)

Figure 6

It is unsurprising that trades in government securities have been booming, even as 10-year yields have been on an uptrend. (Figure 6, topmost diagram) 

This phenomenon suggests two things: potential disguised losses in banks and financial institutions, and second, that these trades have crowded out trading activities in the Philippine Stock Exchange (PSE). 

In 2020, the BSP's historic Php 2.3 trillion intervention occurred partly via its own NCoCG, which is conventionally known as "quantitative easing." Although the present economy has supposedly ‘normalized,” the BSP's NCoCG remains at 2020 levels. This can be expected to surge when public savings and banks' capacity have reached their maximum. (Figure 6, middle image) 

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time. 

We doubt if they can maintain the USD/PHP peg or if they would accommodate a limited peso devaluation. 

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

With this in mind, we can expect both public debt and debt servicing to experience an accelerated rise. Public debt to GDP could hit 2003-2004 levels, while debt servicing should see an equivalent uptrend over the coming years. (Figure 6, lowest chart) 

We should not forget: rising public debt inevitably leads to higher debt servicing, which in turn necessitates more public spending. 

As noted last May 

This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted:

-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop. 

-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures. 

-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral. 

-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation 

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)

Following this, after grappling with debt and inflation, the government is bound to raise taxes. 

XIII. Conclusion: Fiscal Shock Watch 2025 

Unless BSP’s easing gains real economic traction, the first four months of 2025 point to a growing likelihood of a fiscal shock. 

• Revenue collection has deteriorated.
• Economic indicators signal fragility.
• Consumers are heavily indebted and weakening.
• External pressures—Trump's tariffs, deglobalization, and the re-emergence of "bond vigilantes" (investors who sell off government bonds when they believe fiscal policies are unsustainable, thus driving up borrowing costs for the government) could tighten external liquidity and worsen domestic financial conditions. 

Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026. 

If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate.

___

References 

Prudent Investor Newsletter, Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm, May 18, 2025 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, May 4, 2025