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

 

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference—Ludwig von Mises 

In this issue:

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

I. From Oil Shock to Emergency Response

II. The Rice Policy Template

III. Administrative Pricing Returns: The Suspension of the Power Spot Market

IV. Price Control Proof Is Already in the Streets: Shortages Appear

V. Crisis Messaging and Political Theater

VI. Crony Gains in an Energy Emergency

VII. The Financial Stability Motive

VIII. Markets Push Back

IX. Intervention Begets Intervention

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr.

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

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

How EO-110, emergency powers, and BSP policy are converging into a nationwide price-control regime. 

I. From Oil Shock to Emergency Response 

In a previous report, we warned that the Philippines might be entering the early stages of an oil shock.

Events over the past week suggest the policy response is now accelerating. 

Within a span of only a few days, the government has rolled out an unusually rapid sequence of interventions. 

• On March 24, the administration issued Executive Order 110, declaring a national energy emergency.
• On March 25, Congress moved to grant emergency authority to suspend fuel excise taxes.
• On March 26, the Bangko Sentral ng Pilipinas (BSP) held an off-cycle policy meeting and decided to keep interest rates unchanged. 

Each step has been framed as an effort to protect consumers from the impact of rising energy costs. 

Yet taken together, they reveal something broader: the emergence of an integrated policy approach aimed at suppressing the economic transmission of the oil shock. 

This strategy is not entirely new. 

It closely resembles the template already deployed in another politically sensitive sector—rice. 

II. The Rice Policy Template 

Over the past year, rice policy has increasingly relied on administrative intervention. 

The government imposed maximum suggested retail prices (MSRP), released reserves through the National Food Authority, introduced the highly publicized Php 20 rice program, and deployed fiscal subsidies to farmers and importers. 

In effect, the state has attempted to contain consumer prices by transferring costs elsewhere—through fiscal spending, balance-sheet adjustments, and administrative supply management. 

Public choice theorists such as James M. Buchanan and Geoffrey Brennan in The Power to Tax describe this phenomenon as fiscal illusion: the obscuring of the true cost of government through indirect financing—such as borrowing, inflation, or off-budget transfers—allowing policymakers to sustain the appearance of relief while shifting the burden forward. 

This same policy template now appears to be extending into energy markets. 

The national response to the oil shock has included:

• Suspension of transport fare increases
• fuel subsidies for operators
• intensified price monitoring and enforcement
• emergency procurement of oil supplies
• the suspension of fuel excise taxes
• intervention in electricity markets to contain price spikes 

Demands for price controls are also broadening, now encompassing LPG and imported rice. 

As with the rice program, these measures aim to soften the visible price impact of scarcity—while redistributing the underlying costs across the fiscal system and the broader economy.

Figure/Table 1

Policy intervention appears to be expanding sector by sector. Measures initially introduced to stabilize politically sensitive goods are gradually extending into energy markets and financial policy. (Table 1) 

III. Administrative Pricing Returns: The Suspension of the Power Spot Market 

The spread of price suppression is not limited to transport fuels. 

On March 25, the Energy Regulatory Commission ordered the temporary suspension of the Wholesale Electricity Spot Market (WESM) across the Luzon, Visayas, and Mindanao grids after simulations suggested electricity prices could surge to around ₱9 per kilowatt-hour amid the Middle East energy shock. 

The WESM is the Philippines’ real-time electricity trading platform, where elite owned and controlled power producers and distributors buy and sell electricity based on supply and demand conditions. Prices in this ‘caged’ market normally fluctuate to reflect fuel costs, generation capacity, and grid constraints. 

By suspending the market, regulators effectively replaced price discovery with administrative allocation. 

The objective is straightforward: prevent a sudden spike in electricity prices from feeding into consumer inflation. 

But the economic implications are significant. 

Spot markets exist precisely to coordinate supply and demand under changing conditions. When prices rise, they signal scarcity and encourage additional generation or conservation. 

Administrative suspension interrupts that signal. 

Instead of electricity being allocated through price adjustments, dispatch decisions increasingly become centralized—determined by regulatory directives rather than market incentives. 

The result may temporarily contain visible price increases, but it also risks creating deeper distortions in the power sector. 

Power producers must now operate under uncertain compensation conditions, while distributors and large consumers lose the market signals that normally guide electricity procurement. 

In effect, one of the country’s most important energy markets has been replaced—at least temporarily—by administrative pricing. 

This development reinforces a broader pattern emerging across sectors: the gradual substitution of price mechanisms with regulatory control. 

But suppressing prices does not eliminate the underlying imbalance between supply and demand. 

As Friedrich Hayek famously argued in The Use of Knowledge in Society, prices function as signals coordinating dispersed knowledge across the economy. Suspending markets may suppress volatility, but it also suppresses the information that allows the system to adjust. 

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them 

Or suppressing those signals inevitably disrupts the coordination process. It also shifts the adjustment to other parts of the economy.

Yet authorities have not only suspended WESM; they are reportedly considering permanently repealing the only partially deregulated segment of the energy sector, as well as the removal of VAT. Both measures may provide temporary relief, but such band-aid solutions carry the risk of future unintended consequences. 

Moreover, while reducing taxes may be desirable, without corresponding spending constraints this approach would likely worsen fiscal deficits and heighten the fragility of public finances. 

In effect, short-term interventions may shield consumers today, but they also deepen structural vulnerabilities that could amplify costs tomorrow. 

IV. Price Control Proof Is Already in the Streets: Shortages Appear 

Basic economic theory predicts that price ceilings eventually produce shortages. 

Early signs of this dynamic are already emerging. 

Reports indicate that more than 400 gasoline stations have temporarily closed, citing supply difficulties even as authorities insist that fuel inventories remain sufficient. 

Public transport is showing similar strains. 

Jeepneys in Quezon City and bus operators in Metro Manila (about 20%) and Baguio City (up to 50%) have significantly reduced operations, with stranded commuters and growing protests highlighting the mismatch between controlled fares and rising fuel costs. 

As an aside, this is just the first few days! 

Despite subsidy rollouts, the economics of operating public transport under capped fares have become increasingly difficult.

Figure 2

The result is a classic outcome described in the literature on price ceiling: supply contraction rather than price adjustment. (Figure 2, upper window) 

Retail markets are beginning to reflect the same pressures. 

Supermarkets and some food manufacturers have signaled price increases beginning April 1, reversing a March commitment to uphold a temporary two-month price freeze. The Department of Trade and Industry (DTI), however, insists that any price adjustments should not take effect until April 16. 

In the aviation sector, the pattern has been equally revealing. 

After the president warned that aircraft might be grounded if fuel shortages worsened, Philippine Airlines assured the public that jet fuel supplies were sufficient for the ‘foreseeable future.” 

Shortly afterward, the airline quietly cut several domestic and international flight routes  suggesting fuel conservation moves. 

These episodes illustrate a recurring feature of interventionist policy regimes: the widening gap between official reassurance and market behavior. 

V. Crisis Messaging and Political Theater 

Public messaging surrounding the energy situation has evolved rapidly. 

Initially, officials emphasized that there was ‘no energy crisis.’ 

More recently, the government has declared an energy emergency while simultaneously insisting that there is still no reason to panic. 

The pattern echoes a famous observation often attributed to Otto von Bismarck:

never believe anything until it has been officially denied. 

Policy actions suggest a far more serious assessment than the rhetoric implies. 

Authorities have begun cracking down on alleged fuel hoarding, floated the possibility of repealing elements of the country’s oil deregulation law, and raised the prospect of removing the value-added tax on petroleum products (as noted above). 

At the extreme end of the policy spectrum, discussions have even surfaced about the possibility of an energy lockdown should supply conditions deteriorate further. 

As political economist Albert O. Hirschman observed in The Rhetoric of Reaction, crisis politics often produces a distinctive rhetorical pattern: policies framed as temporary necessities gradually become permanent features of governance. 

Taken together, these measures suggest a steady expansion of administrative control not only over the energy sector, but more broadly across society. 

VI. Crony Gains in an Energy Emergency 

While the policy framework emphasizes consumer protection, the distribution of benefits within the energy sector tells a more complex story. 

Several large corporate groups appear poised to gain from the shifting landscape. 

Petron Corporation, a subsidiary of San Miguel Corporation (SMC), has reportedly sourced discounted Russian crude, including last week’s shipments of roughly 700,000 barrels. 

At the same time, Tycoon and SMC chair, Ramon S. Ang has revived proposals for the government to acquire Petron—a move that could effectively transfer part of the firm’s humungous debt burden onto the public balance sheet. 

Such a shift reflects what Gordon Tullock described as rent-seeking dynamics: firms capture gains during favorable market conditions, yet seek to socialize losses when the cycle turns. Private upside, public downside. 

Other developments point in a similar direction. Amid public pressure against coal, policymakers have signaled support for its “temporary” expansion under the banner of energy security—even as official rhetoric continues to favor renewables. 

Despite its political unpopularity, Department of Energy data indicate that coal accounted for an all-time high 62% of gross power generation in 2024. (Figure 2, lower image) 

A subsidiary of Manila Electric Company, Meralco PowerGen Corp. (MGEN), has reportedly expressed interest in assets linked to Semirara Mining and Power Corporation (PSE: SCC). 

Notably, some of these assets had already been subjected to regulatory or contractual rebidding processes prior to the current crisis.  

In that context, the present moment may be less a sudden policy shift than an acceleration of an existing trajectory—one in which administrative actions reshape ownership and market structure. The result is a coal sector that may not only revive, but consolidate under a few hands through policy-mediated channels.

Meanwhile, announcements surrounding the Camago-3 field within the Malampaya Phase 4 gas field development have been presented as evidence of incoming domestic supply. Yet such projects typically take years to materially affect output, and gas contracts remain indexed to global prices.  Absent subsidies, price relief is unlikely in the near term. For now, these announcements function more as reassurance than resolution. 

While the timing of benefits to consumers remains uncertain, the consortium—particularly Tycoon Enrique Razon led Prime Energy—is clearly positioned to capture upstream gains 

As Mancur Olson observed in The Rise and Decline of Nations, crises tend to strengthen “distributional coalitions”—organized interests that secure concentrated benefits while dispersing costs across the broader public. 

The pattern is hardly new. Frédéric Bastiat, in The Law, warned that when the state becomes an instrument for particular interests to extract from the public, law itself is transformed—from a protector of rights into a vehicle for legalized transfer. 

The emerging picture suggests not merely an energy response, but a reconfiguration of advantage. The beneficiaries appear to be those corporate groups already positioned to consolidate and potentially cartelize segments of the country’s energy supply chain. 

In effect, the crisis is not only redistributing costs—it also seems to be concentrating access to resources, decision-making power, and control in fewer hands. 

VII. The Financial Stability Motive 

The government’s intervention in energy and monetary policy may extend beyond protecting consumers. 

Energy shocks transmit rapidly through the financial system: higher fuel prices feed into consumer inflation, which in turn pressures the central bank to tighten policy. The BSP recently revised its 2026 inflation forecast to 5.1%—well above its 2–4% target, underscoring the magnitude of underlying price pressures. Rising interest rates reduce asset valuations and weaken collateral across the banking system.

Figure 3 

As an aside, the BSP’s 5.1% 2026 inflation forecast reveals much about their expectations. With January and February CPI at 2% and 2.4%, this implies that the average CPI for the remaining ten months would need to reach roughly 5.68%. Such a trajectory would push monthly CPI above 6%, potentially testing or exceeding the 8.7% high recorded in February 2023! If realized, this would reinforce what appears to be our long projected third wave of the CPI cycle since 2015. (Figure 3, upper graph) 

Banks in the Philippines are heavily exposed to property lending and government securities. A rapid rise in rates could trigger cascading balance-sheet pressures—falling bond prices, declining property valuations, and rising non-performing loans. From this perspective, suppressing the visible impact of the oil shock may help delay financial tightening. 

The BSP’s off-cycle decision to hold policy rates steady has been widely interpreted as part of this stabilization effort. Officials from the Bureau of the Treasury have acknowledged or admitted that maintaining stable borrowing conditions in the bond market was an important consideration. 

In effect, the policy response aims to keep inflation, interest rates, and asset prices contained simultaneously. 

These constraints are consistent with the structural limitations faced by semi-peripheral economies. The Philippines’ persistent savings–investment gap makes it reliant on external capital, which limits independent monetary policy and exposes the financial system to global market pressures. As Giovanni Arrighi observed, countries in the semi-periphery are structurally dependent on foreign financing and currency, leaving central banks with limited room to maneuver. 

The BSP is therefore not simply choosing between “good” and “bad” options; it is deciding which part of the balance sheet to protect first. 

VIII. Markets Push Back 

Financial markets rarely remain passive. The US dollar–Philippine peso exchange rate has surged to a record 60.55, marking a historic low for the peso. 

At the same time, government bond yields—particularly in the one- to seven-year segment—have moved decisively higher, underscoring growing unease about fiscal stability and inflation risks. (Figure 3, lower chart) 

Although Philippine equity markets have declined, trading patterns suggest that downside volatility is being deliberately managed, or at least cushioned, within the heavily weighted components of the PSEi-30 index. 

The market’s verdict appears clear: the Bangko Sentral ng Pilipinas (BSP) is likely to absorb external pressures through currency adjustment rather than aggressive rate hikes and use of reserves, constrained by fiscal realities. 

Inflation is nearing 5%, with second-round effects increasingly visible across transport, food, fertilizer, and electricity costs. These pressures are no longer isolated—they are feeding into broader economic feedback loops. 

Meanwhile, signs of strain are becoming more evident across the broader economy. 

The retail sector continues to undergo restructuring. Marks & Spencer has withdrawn its operations despite earlier signals of recalibration, while Robinsons Retail has announced the closure of its No Brand outlets. The conglomerate is also reportedly considering the possibility of delisting from the Philippine Stock Exchange. 

Taken together, these developments may reflect more than isolated corporate decisions. They point to a tightening environment for both consumers and listed firms, as financing conditions gradually shift and economic pressures intensify.

IX. Intervention Begets Intervention

Figure/Table 4

Intervention often follows a self-reinforcing cycle. Initial controls distort market signals, producing shortages that then justify further administrative action. (Figure 4) 

The trajectory of recent policy decisions follows a pattern long recognized in economic theory.

Austrian economist Ludwig von Mises argued that partial government intervention in markets tends to generate unintended distortions that eventually require additional intervention. 

Wrote the great von Mises 

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must enlarge the sphere of the commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.

Either production can be directed by the prices fixed on the market by the buying or the abstention from buying on the part of the public; or it can be directed by the government’s offices. There is no third solution available. Government control of a part of prices only results in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest. 

The preeminent Dean of Austrian School of Economics, Murray Rothbard’s concept of triangular intervention helps explain how regulating one set of exchanges can distort others, setting off a chain of interventions across sectors. 

A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging… 

Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people. 

More broadly, the expansion of state authority during crises was famously analyzed by historian Robert Higgs, who observed that emergency conditions often lead to permanent increases in government control over economic activity. 

The emerging policy response to the oil shock appears to be following this familiar path.

• Price controls lead to shortages.
• Shortages trigger enforcement actions.
• Enforcement expands administrative authority.
• Administrative authority creates new political and economic beneficiaries. 

The cycle then repeats.

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr. 

The Philippines has confronted energy shocks before. But the institutional setting of the crisis today differs profoundly from the one that shaped the policy response half a century ago. 

During the global oil shocks of the 1970s—particularly the 1973 Oil Crisis and 1979 Oil Crisis—the Philippines was already operating under authoritarian rule. Ferdinand Marcos Sr. had declared Martial Law in the Philippines in September 1972, consolidating political power and weakening institutional checks on executive authority. 

Energy policy therefore unfolded within a centralized political system capable of imposing controls, directing credit, and reorganizing industries with limited resistance. 

The current oil shock, by contrast, is unfolding under the presidency of Ferdinand Marcos Jr. within a formally democratic political structure. Instead of authoritarian command, policy is emerging through a rapid layering of interventions—executive orders, emergency powers, regulatory suspensions, subsidies, and monetary accommodation. 

This difference matters.

Figure/Table 5 

Energy shocks have struck the Philippines under both Marcos administrations. The key difference lies in the institutional pathway of intervention: centralized command under martial law in the 1970s versus layered regulatory and fiscal intervention within a democratic framework today. (Figure/Table 5) 

In the 1970s, authoritarian institutions allowed the state to impose controls directly and sustain them over time. Today, similar economic objectives must be pursued through a more fragmented political process involving subsidies, administrative pricing, and financial policy coordination. 

Yet the economic trajectory may still converge. 

The interventionist policies of the 1970s ultimately culminated in the Philippine external debt crisis of 1983, when mounting fiscal deficits, rising external borrowing, and weakening investor confidence forced a restructuring of sovereign obligations. 

Today’s macroeconomic backdrop exhibits its own form of imbalance. 

Fiscal deficits remain historically elevated. Public debt has risen sharply relative to national output. Liquidity conditions—reflected in rapid monetary expansion and sustained deficit financing—have reached levels rarely seen in the country’s economic history. 

Measured as shares of GDP, many of these indicators appear manageable. But GDP itself increasingly reflects government spending and credit expansion rather than productivity growth. 

In that sense, the underlying dynamics bear an uncomfortable resemblance to the earlier era.

The key difference is speed. 

During the 1970s, the accumulation of distortions took years to unfold. Today, early symptoms are appearing within days of the policy response. 

Transport shortages are already emerging only days after the declaration of the energy emergency. If such distortions persist, the policy logic may lead to further escalation: larger subsidies, deeper price controls, emergency procurement programs, and expanding administrative authority. 

Economic crises have historically been fertile ground for political centralization. Severe shocks—whether economic, geopolitical, or social—often generate the conditions under which governments justify extraordinary powers. 

The Philippines’ current constitutional framework imposes safeguards against such outcomes. Yet history also shows that institutional constraints can erode rapidly under sustained crisis conditions. 

Whether today’s oil shock remains an economic problem—or evolves into a broader political one—will depend less on official assurances than on the incentives shaping policy decisions in the months ahead. 

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

The oil shock may only be the beginning. EO-110 could come to be seen not as a solution, but as the opening phase of a broader cycle of intervention. 

From rice to fuel, from transportation to energy markets, policy is increasingly aimed at suppressing how rising costs flow through the economy—seeking to contain inflation, stabilize financial conditions, and preserve asset values. 

Yet economic reality rarely accommodates such efforts for long. Suppressing prices does not remove scarcity; it merely redirects it. The adjustment reemerges elsewhere—through fiscal strain, currency pressure, supply disruptions, or financial instability. 

The Philippines may therefore be entering not just an energy emergency, but a wider economic experiment: an attempt to delay market adjustment through expanding intervention. History suggests these efforts seldom end as intended. 

The real question is no longer whether adjustment will occur—but where the pressure will surface next.

 

 

 

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

 

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side― John Wolfgang Goethe

 

In this issue

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle

Conclusion: Accommodation as Policy, Crisis as Outcome 

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle 

Inflation optics, soft-peg constraints, and the mounting cost of balance-sheet preservation.

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing 

Interest rate cuts have become the by-phrase of the local financial community. 

Authorities continue to signal sustained monetary loosening as economic stimulus, while establishment economists and legacy media have rationalized financial easing—and the resulting rally in the PSEi 30—as a necessary catalyst for market recovery. Ironically, the same narrative also attributes the peso’s record weakness to this easing cycle. 

Either the mainstream genuinely believes that peso depreciation and economic recovery naturally go hand in hand, or market relationships are being selectively blurred or fudged to justify coordinated equity-market pumps.

Recent BSP releases—including the Universal and Commercial (UC) Bank’s November Loans Outstanding, the November Depository Corporations Survey, the November Philippine Bank’s Balance Sheet and Selected Performance Indicators, and the December central bank survey (MAS) indicators—tell a more troubling story beneath the liquidity narrative. 

Since late 2024, the BSP has pursued an extended easing cycle combining aggressive reserve-requirement reductions and repeated policy rate cuts, alongside financial backstops such as the doubling of deposit insurance coverage. 

Reserve requirements for UC banks were slashed from 9.5% to 7.0% in late 2024, and further to 5.0% by March 2025, amounting to a 450-basis-point liquidity release. Over the same period, successive rate cuts brought the policy rate down to 4.5% by December 2025. 

This accommodative stance unfolded against the backdrop of lingering pandemic-era fiscal deficits, whose credibility was further strained by the flood-control corruption controversy that erupted in Q3 2025. 

Yet despite persistent easing signals, private credit growth failed to re-accelerate. 

Figure 1

Universal bank lending peaked in January 2025 and slowed again by November, with both production loans and consumer credit losing momentum. (Figure 1, topmost window) 

UC banks reported a marked deceleration in November 2025, with total loan growth at around 10.7%, the slowest pace since late 2024. This was driven by weakening production loan growth (about 9.0%), while consumer credit, though still elevated in nominal terms, cooled to roughly 23%, its slowest expansion since late 2023. (Figure 1, middle image) 

This slowdown is striking given the macro backdrop: post-4% Q3 GDP growth, moderating inflation, and near-full employment—conditions that should, in theory, have reinforced credit demand. 

Instead, while lending momentum faded, monetary liquidity continued to expand. M1 growth (cash in circulation and transferable deposits) remained positive at just over 7% in November, extending its uptrend even as credit creation slowed. (Figure 1, lowest graph)

Figure 2

At the same time, deposit liabilities grew by only about 7.3%, continuing to underperform loan growth and reinforcing the underlying imbalance. (Figure 2, topmost visual) 

Taken together—slowing production and consumer loans, lagging deposit growth, and rising transactional liquidity—the evidence suggests that monetary easing is no longer transmitting into productive credit formation. 

Rather than catalyzing real investment, it appears to be inflating balance sheets and leverage, heightening systemic fragility without delivering commensurate real-economy gains. 

That is not all. 

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth 

In the BSP’s December central bank survey, currency issuance not only surged to a record Php 3.2 trillion, but its year-on-year YoY growth accelerated to about 17–18%, surpassing the 2018 spike and ranking as the third-highest on record, behind only 2008 and 2020. (Figure 2 middle image) 

Notably, 2018 coincided with the BSP’s baptismal phase of its reserve-requirement (RRR) easing cycle, while 2008 (Great Financial Crisis) and 2020 (Pandemic recession) were both periods marked by domestic economic stress and volatility spikes of the USDPHP. 

History may not repeat—but does it rhyme? 

This liquidity surge, which should be further reflected in the December Depository Corporations Survey, likely contributed to the January-effect euphoria in the PSE, reinforcing asset (equity) price inflation even as credit growth slowed. 

Crucially, this marginal liquidity growth is not coming from private lending. 

Instead, net claims on the central government (NCoCG) held by banks surged to a record Php 5.89 trillion, up roughly 11% year-on-year, the fastest pace since mid-2024. 

At the same time, the BSP’s own NCoCG rebounded to around Php 760 billion—its highest nominal level since March 2025, largely due to a sharp decline in liabilities to the national government—despite falling nearly 20% YoY. (Figure 2, lowest chart) 

This decline most plausibly reflects a drawdown of government deposits at the BSP or reduced sterilization vis-à-vis the Treasury, mechanically releasing base money into the financial system. While debt repayment is a theoretical alternative, the persistence of record public debt levels as of November (Php 17.562 trillion) makes that explanation unlikely. 

Despite falling Treasury yields—which have reduced banks’ mark-to-market losses and should have eased balance-sheet pressures—banks continued to accumulate sovereign exposure.

Figure 3

Held-to-Maturity (HTM) securities climbed to a record Php 4.08 trillion in November, underscoring a significant reallocation into government paper. HTMs now account for roughly 70% of banks’ net claims on the central government. (Figure 3, topmost window) 

Banks have also escalated on investments. After a brief pullback in September from unprecedented highs, Available-for-Sale (AFS) securities rebounded by over 7% to Php 3.30 trillion, approaching HTM levels and reinforcing the portfolio shift away from private credit. (Figure 3, middle diagram) 

Yet despite record nominal credit, aggressive securities accumulation, and abundant liquidity, bank liquidity metrics continue to deteriorate. (Figure 3, lowest graph) 

• Liquid assets-to-deposits fell to about 47%, near pre-easing and pandemic-era lows, effectively erasing the BSP’s 2020-21 emergency liquidity buffers. 
• Cash-to-deposits dropped to roughly 9.7% in November, the second-lowest level on record.

Figure 4

While banks have reduced bills payable, bond payables continued to rise, lifting total borrowings to around Php 1.5 trillion, down from the Php 1.906 trillion March 2025 peak but still elevated. (Figure 4, topmost window) 

Liquidity management has increasingly shifted inward: interbank lending surged to a record Php 502 billion, alongside repo transactions exceeding Php 100 billion, signaling intensive liquidity recycling within the banking system. (Figure 4, middle image) 

Taken together, these figures point to a clear pattern. 

Banks are reallocating balance sheets toward sovereign absorption, liquidity management, and interbank cushioning—not expanding productive credit. The BSP, in turn, appears less to be steering outcomes than accommodating them, validating financial system preferences rather than redirecting capital toward growth. 

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle 

The BSP’s recent policy trajectory reveals a central bank anchored less to credit conditions or balance-sheet health than to inflation optics and system accommodation. 

Reserve-requirement cuts and successive policy-rate reductions have consistently followed periods of CPI deceleration, even amid deteriorating bank liquidity metrics, balance sheets increasingly tilted toward sovereign absorption, and liquidity being recycled within the financial system rather than funding productive expansion. (Figure 4, lowest chart) 

Monetary easing, in this context, has been CPI-conditioned rather than cycle-stabilizing. 

CPI, therefore, becomes highly politicized and susceptible to the policy agendas of political leadership. 

Why this persistence? 

While the BSP’s inflation-targeting framework does not explicitly target asset prices, it cannot ignore collateral values in a bank-dominated financial system. 

Falling collateral values threaten capital adequacy, impair credit transmission, and raise systemic stress. Policy calibration therefore prioritizes preventing balance-sheet rupture, even when that means sustaining distortions and postponing adjustment.

Figure 5

This implicit bias toward continuity has encouraged banks to manage imbalances rather than resolve them—through accounting optics, ratio management, and asset reclassification. 

Non-performing and related risks (e.g. loan loss provision) are contained not by deleveraging, but by supporting numerator growth (total loan portfolio—TLP—or bank credit growth) relative to denominators, a classic Wile E. Coyote velocity dynamic: balance sheets continue running forward, suspended by liquidity and policy accommodation, even as underlying fundamentals weaken. (Figure 5, top and middle panes) 

The same dynamic appears on the BSP’s external balance sheet. While net foreign assets (NFA) remain elevated, their support increasingly comes from valuation and financing effects rather than organic FX inflows. 

• Rising global gold prices mechanically lift reserve valuations without expanding usable foreign-exchange buffers. (Figure 5, lowest graph) 
• National government external borrowing routed through the BSP temporarily bolsters NFA, but these gains are liability-mirrored, not earned. 
• Bank borrowings similarly augment liquidity while obscuring underlying fragility.

Figure 6

More revealing than the level of NFA is its slowing rate of accumulation, which coincides with persistent USDPHP pressure. (Figure 6, topmost visual) 

This deceleration signals that the BSP’s capacity to manage the exchange rate is increasingly constrained by the very accommodations it sustains. 

Peso dynamics, therefore, are not incidental. Under the BSP’s soft-peg regime, exchange-rate management remains a direct but tacit policy objective, subordinated to liquidity preservation, fiscal dominance, and bailout imperatives. (Figure 6, lowest chart) 

Rather than defending a fixed level, the BSP has been compelled to tolerate managed depreciation, balancing currency weakness against the need to sustain domestic liquidity and support a political economy defined by a widening savings-investment gap. 

USDPHP hit a record 59.46 last week amid declining volume and suppressed volatility, highlighting trade constraints and the footprint of BSP intervention. 

This trade-off is most visible in energy and utility pricing—not through import dependence, but through bailout architecture. Producer subsidies, RPT reliefs, administered pricing, and government-nudged implicit M&A arrangements suppress inflation pass-through while deepening balance-sheet entanglement between the state, the financial system, and regulated corporates. 

CPI relief is achieved, but only by displacing risk elsewhere in the system. 

• In this sense, the regime exemplifies Goodhart’s Law: by targeting CPI, other signals—credit quality, liquidity resilience, capital discipline—are progressively distorted. 
• It also reflects a Heisenberg Uncertainty-style policy problem: intervention alters the system it seeks to stabilize, most visibly in leverage-dependent sectors and currency dynamics. 

Sustained FX intervention further amplifies this fragility, increasing the risk that adjustment, when it arrives, will be sharper and more volatile. 

Viewed together, the pattern is consistent. The BSP is not directing capital toward productive expansion nor pre-empting cyclical deterioration. It is validating outcomes shaped by asset inflation, fiscal dominance, bailout logic, and inflation optics, accommodating systemic constraints in ways that systematically favor incumbents. 

The public is offered stability in appearance, while adjustment is deferred—quietly, repeatedly, and at growing long-term cost. 

Conclusion: Accommodation as Policy, Crisis as Outcome 

The evidence presented does not describe policy error in the conventional sense. It reflects the unintended consequences of an institutional regime constraint operating within a political-economic framework that systematically privileges incumbent interests. 

The BSP and the bank-dominated financial system operate under conditions where inflation optics, fiscal dominance, bailout dependencies, and soft-peg maintenance sharply limit genuine counter-cyclical control. Within this structure, discretion is less about steering the cycle than accommodating existing balance-sheet vulnerabilities. 

What is sold as stimulus is largely balance-sheet preservation; what is promoted as stability is increasingly liquidity- and valuation-driven; and what appears as growth is often internal transactional recycling rather than productive expansion. 

In such a regime, monetary policy does not fail abruptly — it erodes gradually, until markets, balance sheets, or external constraints force destabilizing adjustments. 

The risk is not that the peso weakens, or that interest rates are “too low,” but that accumulated distortions increase the likelihood that eventual correction becomes more volatile, less controllable, and more socially costly. 

This is not an argument about intent or competence. It is an argument about incentives, institutional constraints, and the limits of accommodation once gravity reasserts itself. 

Where political-ideological rigidity suppresses reform, crisis ceases to be an accident and becomes the logical endgame.