What Surprise is in Store for the 2025 Year of the Wooden Snake?

 

Mundus vult decipi, ergo decipiatur (The world wants to be deceived, so let it be deceived) —Sebastian Brant (also Brandt) 

In this issue

What Surprise is in Store for the 2025 Year of the Wooden Snake?

I. 2025: The Year of the Wooden Snake, Zodiac Cycles and Sociology

II. Trump 2.0 and Current Geopolitical Developments

III. Geopolitical Milestones in the Year of the Snake

IV. The Influence of the Year of the Snake on the Global Economy and Financial Markets

V. The Impact of the Year of the Snake on Philippine Politics and Economy

VI. A Comparative Analysis of the Year of the Snake's Impact on the Philippines

VII. Conclusion

What Surprise is in Store for the 2025 Year of the Wooden Snake?

How will the 2025 Year of the Snake impact geopolitics, the global economy, and financial markets? Will it be a year of upheaval or opportunity for the Philippines?

I. 2025: The Year of the Wooden Snake, Zodiac Cycles and Sociology

2025 is the Year of the Wooden Snake. To gain insight into what this might signify, a quote from the article offers a succinct summary. 

Chinese new year 2025 is an especially fortuitous one as it is ruled over by the wood snake, a sign associated with wisdom, intuition, and renewal. It’s a combination of an animal (the snake) and an element (wood) that occurs once every 60 years. It promises to be a period full of unique energy with some distinct characteristics…The combination of snake and wood creates a special synergy in which the introspective and transformative energy of the snake is paired with wood’s expansive and balanced nature. (Mendoza, 2025)

Optimism consistently pervades the annual forecasts for the Chinese zodiac calendar. The zodiac embodies a 12-year cycle, each year symbolized by an animal and its associated attributes.

While we remain agnostic about this tradition (and its geomantic counterpart, feng shui), significant events occurring within the year might appear as circumstantial coincidences or could indeed signal potential cyclical patterns within the political economy. 

In other words, certain aspects of astrology might intersect with sociological phenomena. 

For instance, our analysis of geopolitical developments through the lens of the Chinese zodiac cycles fortuitously resulted in our accurate prediction of the outbreak of the Russia-Ukraine War in February 2022. 

Aside from the eroding concerns over the pandemic, potential geopolitical flashpoints for a hot war may occur.  

For instance, the US-Russian impasse over Ukraine (Russia’s vehement objection over the slippery slope of NATO’s expansion into her borders) (Prudent Investor, January 2022) 

Thus, an examination of global and local developments over 12-year cycles may provide valuable clues for 2025. 

II. Trump 2.0 and Current Geopolitical Developments

Donald Trump’s inauguration as the 47th President of the United States will be held on January 20th, just 9 days ahead of the Chinese New Year on January 29th. This timing suggests that at the start of his term, he will busily sign numerous Executive Orders (EOs) that could significantly influence the geopolitical landscape this year. 

Even before taking office, geopolitical developments have already moved in anticipation of his potential actions.

Israel and Hamas have agreed to a ceasefire, which takes effect on Sunday, January 19th—469 days after the conflict began on October 7, 2023. President-elect Trump reportedly had significant influence over this deal. 

Still, Israeli Prime Minister Netanyahu has publicly stated that the ceasefire with Hamas, as discussed with Trump, is intended to be "temporary." 

The incoming president is also reportedly considering easing sanctions on Russian oil exports in exchange for a peace deal with Ukraine, while simultaneously exerting pressure on Iran and Venezuela. 

While the incoming cabinet has reportedly been filled with pro-Israel lackeys and are hostile towards relations with China and Russia, Trump recently posted a video on his X account suggesting that the Syria and Iraq wars were orchestrated by Israel’s Netanyahu. 

Trump also had a phone call with China’s President Xi on January 17th, where both leaders declared on X.com they would “do everything possible to make the world more peaceful and safe.”

Following the sudden collapse of Assad-led Syria, Russian President Putin and Iranian President Raisi signed a “comprehensive partnership agreement” on January 17th, likely aimed at deterring any potential aggression from the U.S.-Israel alliance

Donald Trump has added complexity to geopolitics by exerting pressure on his allies. 

1. He has cited the need to pursue the acquisition of the Panama Canal.

2. Beyond securing access to critical mineral resources, Trump has proposed the acquisition of Greenland and the annexation of Canada, potentially to extend the U.S. sphere of influence in the Arctic Circle, competing with Russia. This strategy might also serve to divert attention from escalating war tensions with Russia and China.

As historian Eric Margolis suggested, "Trump has started a scramble of imperial rebranding"

3. Additionally, Trump has urged NATO members to increase their defense spending to 5% of GDP.

4. Could the alleged snubbing of the Philippine leadership at Trump’s inauguration signal a potential shift in US-Philippines foreign relations?

Trump's presidency promises to be a period of intense geopolitical activities, where traditional alliances might be tested, and new power dynamics could emerge, all under the ambitious and often unpredictable deal-making leadership of the 47th President of the United States.

III. Geopolitical Milestones in the Year of the Snake

Based on historical analysis and considering the cyclical nature of the Chinese zodiac, here are significant geopolitical milestones that occurred in various Years of the Snake: 

1917: The United States joined the Allies and entered World War I in April 1917. This was a pivotal moment that contributed to the eventual end of the war.

1941: The Bombing of Pearl Harbor on December 7, 1941, prompted the U.S. entry into World War II, significantly altering the course of the conflict.

Operation Barbarossa: Launched on June 22, 1941, this was Nazi Germany's invasion of the Soviet Union, marking the beginning of a massive Eastern Front campaign in World War II. This operation was one of the largest military operations in history and had profound effects on the war's outcome.

The Battle of Moscow, marking a turning point on the Eastern Front for the Russians against the invading Germans in World War II, also took place in (October 2) 1941-42. This battle was crucial for halting the German advance into the Soviet Union.

1953: The Korean War concluded with an armistice agreement on July 27, 1953, ending three years of conflict and setting the stage for the division of Korea that persists today.

1965: The U.S. significantly escalated its involvement in the Vietnam War in 1965, marking a major expansion of American military presence in Southeast Asia.

1989: The Tiananmen Square Massacre in China, from April 15 to June 4, 1989, involved the violent suppression of pro-democracy protests, impacting China's international image and domestic politics.

The Fall of the Berlin Wall on November 9, 1989, marked the end of the Cold War and was a precursor to the reunification of Germany, signaling the decline of the Soviet sphere of influence in Eastern Europe. 

2001: The 9/11 Terrorist Attacks on September 11, 2001, devastated the U.S., leading to the initiation of the War on Terror. This event reshaped global security dynamics.

The War in Afghanistan began 1-month later that year as the U.S. response to the 9/11 attacks, marking the start of a long-term military engagement in the region.

2013: The Syrian Civil War saw increased international involvement in 2013, with discussions around chemical weapon use and subsequent military actions, further complicating the conflict.

The Snake is often linked with transformation, introspection, and unpredictability, suggesting that geopolitical tensions might rise or escalate. The Wood element, associated with growth and expansion, could also signify potential for new power struggles. On the other hand, the introspective nature of the Snake might promote diplomatic efforts and peace negotiations, leading to the conclusion of ongoing conflicts.

In sum, the impact of the Year of the Wood Snake will depend on a complex array of interdependent factors, including global political dynamics, the influence of vested interest groups such as the military-industrial complex, hegemonists, and political elites, as well as leadership decisions and international diplomacy. This year tends to bring significant changes, with the potential for new conflicts to emerge, existing wars to escalate, and the possibility of resolving ongoing disputes, reflecting the intricate interplay of forces during this zodiac cycle.

IV. The Influence of the Year of the Snake on the Global Economy and Financial Markets

The influence of the Year of the Snake on the global economy and financial markets have been significant

1929: The U.S. stock market crash of 1929 precipitated the Great Depression, causing global economic devastation, massive unemployment, and profound financial instability. 

1941: U.S. economic mobilization for World War II marked a shift toward a war economy. This also resulted in increased U.S. wartime financing through the issuance of war bonds, a growing national debt and the Fed’s financial repression policies.

World War II also led to the U.S. Lend-Lease Act, which strengthened economic ties between the U.S. and Allied nations. 

1965: Often cited as part of the Golden Age of capitalism, 1965 marked a peak in the post-WWII economic boom in Western nations, particularly the U.S. and Europe.

Figure 1

The Bretton Woods System started showing signs of strain mounting due to inflationary pressures and vastly increased spending related to the Vietnam War. (Figure 1, upper graph)

1977: Following the Nixon Shock in 1971, the post-Bretton Woods era led to U.S. dollar weakness and inflationary pressures.

1989: The fall of the Berlin Wall paved the way for Germany's economic reunification. 

Global market liberalization advanced, emphasizing free trade and deregulation.

Despite the Bank of Japan's monetary tightening, the Nikkei 225 reached an all-time high of 38,957.44 on December 29, 1989, amidst a Tokyo land price crash. 

2001: The bursting of the Dot-Com Bubble led to a recession, with considerable stock market losses, particularly in tech stocks, and an eight-month U.S. economic contraction.

The 9/11 attacks further destabilized global markets.

China's accession to the WTO significantly expanded its global trade presence.

2013: The "Taper Tantrum" occurred when Federal Reserve Chairman Bernanke announced a potential reduction in bond purchases, causing U.S. bond yields to rise and leading to instability in emerging markets.

The U.S. Dollar Index (DXY), which tracks the value of the U.S. dollar against a basket of six major trading partners' currencies, began its nearly 12-year uptrend in 2013. (Figure 1, lower image) 

Meanwhile, the Eurozone crisis persisted, with Greece and other nations continuing to face financial instability.

The Year of the Snake has historically been associated with heightened volatility in both geopolitics and domestic politics, and its interconnectedness with economics reveals similar underlying dynamics.

Historically, periods marked by surging asset bubbles, financial system pressures, recessions, and rapid economic expansion have all been part of this recurring cycle.

Looking ahead to 2025, uncertainties abound. However, the growing deep-seated economic imbalances—characterized by unprecedented debt levels, record deficits, and central bank policies favoring easy money—along with rising protectionism, the weaponization of finance, and speculative asset bubbles, all point to an increased risk of significant downside volatility.

V. The Impact of the Year of the Snake on Philippine Politics and Economy

How has the year of the Snake affected the Philippines.

1929: The Great Depression severely impacted the Philippine economy, which was still a U.S. colony, due to its dependence on U.S. markets.

1941: Imperial Japan launched a surprise attack on Clark Field and Iba Field on the opening day of hostilities in the Philippines, a day after the attack on Pearl Harbor. This paved the way for the Japanese occupation, causing massive socio-economic devastation.

1953: Former Defense Secretary Ramon Magsaysay was elected as the seventh President of the Philippines. The post-World War II economic recovery was still underway, with the country grappling with the repercussions of the war, including ongoing rebuilding efforts.

1965: Ferdinand Marcos Sr. was elected the tenth President of the Philippines. His victory marked the beginning of a long tenure in power, eventually leading to the declaration of martial law in 1972.

1977: Since the establishment of Martial Law in 1972, the administration of Ferdinand Marcos Sr. had suppressed political dissent and controlled growing unrest, which resulted in widespread human rights violations.

During this period, the Philippine economy was characterized by massive government spending on infrastructure projects, largely funded through loans. This led to rising external debt, which became a significant issue in the later years of Marcos' rule. In 1977, Marcos issued Presidential Decree 1177, which mandated automatic appropriations for debt servicing. 

The imposition of Martial Law coincided with economic instability, partly exacerbated by the global oil crisis, high inflation, and escalating debt levels.

1989: The late 1980s were marked by political turmoil and growing opposition to the regime of Corazon Aquino, who had assumed power after the 1986 People Power Revolution (People Power I).

In 1989, the Reform Armed Forces of the Philippines (RAFP) launched the most serious coup attempt against the Aquino government, among many previous attempts, highlighting dissatisfaction with her leadership and resistance to her reforms.

Despite Aquino's efforts to stabilize the economy, the country continued to face persistent challenges, including high levels of foreign debt and inflation. However, Aquino’s administration made significant strides in implementing market-oriented reforms and privatizing state-run enterprises, though the country still struggled due to global economic conditions and internal political instability.

2001: In January 2001, President Joseph Estrada was ousted in a second People Power Revolution, also known as People Power II, after being accused of corruption. Estrada’s impeachment and subsequent removal from office, amid widespread public protests, marked a significant political transition. Vice President Gloria Macapagal Arroyo was sworn in as the new president, though the transition was accompanied by significant political unrest and instability.

At the time, the Philippines was grappling with substantial economic challenges, including the aftermath of the 1997 Asian Financial Crisis and declining investor confidence during Estrada's administration.

Figure 2

2013: The Philippine economy showed robust growth, reaching a significant milestone with an upgrade to an investment-grade credit rating by major rating agencies.  (Figure 2, topmost chart)

The economy grew at an impressive rate of 6.8% for the year.

Simultaneously, Philippine assets reached key milestones, reflecting strong investor confidence in the market during this period.

The Philippine Stock Exchange’s PSEi 30 had a record-breaking year, hitting new highs in May 2013. (Figure 2, middle diagram)

The Philippine peso rallied to a five-year high, or the US dollar-to-Philippine peso exchange rate fell to a five-year low. (Figure 2, middle chart)

In April 2013, Philippine 10-year bond yields hit all-time lows or Philippine bonds rallied to historic highs. (Figure 2, lowest graph)

In my humble opinion, 2013 signified the genuine bull market peak of the PSEi 30, which has been affirmed by both the USD-PHP exchange rate and the bond markets.

Once again, like its global counterparts, the Year of the Snake in the Philippines has historically coincided with moments of political upheaval, such as the rise and fall of leaders, coup attempts, and the People Power Revolution, as well as economic challenges and heightened volatility like inflation, debt, instability, and periods of market euphoria.

VI. A Comparative Analysis of the Year of the Snake's Impact on the Philippines

Finally, let us provide a concise analysis of the comparative performances during the Year of the Snake.

Nota Bene: The underlying dynamics behind each economic statistic differ from period to period.

Figure 3

The headline GDP experienced its best performance post-independence from the U.S. and post-bellum or post-war recovery in the Water Snake year of 1953, which saw an 8.9% GDP growth. (Figure 3, upper window)

With the exception of 2001, the headline GDP has been rising since then, with 2013 representing its highest level.

However, the Water Snake year of 1953 was followed by a sharp decline in the Wooden Snake year of 1965. If history follows its pattern, could we witness a sharp drop in GDP? Or will the uptrend since 1965 continue?

The average headline GDP during the Year of the Snake since 1953 stands at 5.4%.

Could the Year of the Snake also reflect trends in the Consumer Price Index (CPI) cycle?

The CPI surged from its trough in the Wooden Snake year of 1965 to its peak of 10.7% in 1989, before descending to 2.6% in the Water Snake year of 2013.

Does this suggest a cyclical pattern of three Snake years (or every 24 years)? Or could the CPI rise sharply in the upcoming Wooden Snake year? (Figure 3, lower chart)

The average CPI during the Year of the Snake since 1965 is 6%.

Figure 4

The USD-PHP exchange rate seems inclined to appreciate during the Year of the Snake. It gained in three of the last four Snake years, averaging 4.6%, particularly due to the 2001 return, which coincided with the weakest GDP performance among Snake years. (Figure 4, upper pane)

Moving to the PSE. Since its largest return of 31.24% in 1989, the Philippine’s major equity benchmark, the PSEi 30 has struggled. However, despite its mixed performance, the five Year of the Snake episodes since 1965 have yielded an average return of 4.1%, thanks in large part to the notable gains in 1989. (Figure 4, lower graph)

The Snake years reveal that the USD-PHP's largest returns, the weakest GDP, and the most significant decline in the PSEi 30 share a common denominator: the Metal Snake year of 2001.

Key global events—such as the bursting of the dot-com bubble, the dot-com recession in the U.S., the 9/11 attacks, and local political upheaval in the Philippines marked by People Power 2, alongside the country's post-Asian Crisis economic challenges in 2001—contributed to this outcome. 

VII. Conclusion

In examining the economic patterns associated with the Year of the Snake in the Philippines, we observe a tapestry of significant historical events and economic indicators. From the peak GDP growth in 1953 to the financial turbulence of 2001 and to the financial euphoria of 2013, these years have often been marked by notable shifts in political power, economic policy, market cycles and external shocks with each year adding a unique chapter to the country's economic and political story.

As we look towards 2025, while historical trends provide valuable insights, the future remains uncertain. Given the current global and domestic economic imbalances, the Year of the Snake may again usher in another period of heightened risk and potential volatility. As always, the interplay of external events, governmental actions, and market responses will determine whether the Snake’s legacy of upheaval or opportunity will prevail. 

____

References

Corina Mendoza Architectural Chinese new year 2025: Here's what to expect in the year of the Wood Snake January 1 2025 

Prudent Investor, What Surprise is in Store for the 2022 Year of the Water Tiger? January 23, 2022 

Other Zodiac series

What Surprise is in Store for the 2023 Year of the Water Rabbit? January 22, 2023

What Surprise is in Store for the 2024 Year of the Wooden Dragon? February 11, 2024

 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate

 

Balance of payments crises are created in (soft) pegged arrangement because the monetary authority simultaneously targets both the exchange rate and interest rate and fails on both counts—Steve Hanke 

In this issue

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate

I. Closing 2024: Major Interventions Boost the Philippine Peso and PSEi 30

II. A Brief History of the USDPHP's Soft Peg

III. USDPHP Peg: Tactical Policy Measures: Magnifying Systemic Risks

IV. The Cost of Cheap Dollars: Financing Challenges and Soaring External Debt

V. USDPHP Peg: The Other Consequences

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate 

The Philippine peso mounted a strong rally in the last week of 2024, a hallmark of the BSP's defense of the USDPHP soft-peg regime. Why such policies would boost it past 60! 

I Closing 2024: Major Interventions Boost the Philippine Peso and PSEi 30

In the last week of December, I proposed in a tweet that the BSP and their "national team" cohorts might engage in "painting the tape" to boost Philippine asset prices during the final two trading sessions of the year.  

The BSP and their Philippine "national team" have 2 days left in 2024 to steepen Treasury markets, limit $USDPHP gains, and boost #PSEi30 returns after Friday's massive 5 minute pre-closing pump (correction: should have been Monday instead of Friday)

Figure 1 

This post turned out to be prescient. The "national team" apparently didn’t allow any major corrections on the PSEi 30 following Monday’s powerful 5-minute pump, subsequently, following it up with another two-day massive pre-closing rescue pump. (Figure 1, topmost charts)

However, the USD Philippine peso exchange rate (USDPHP) market exhibited even more prominent interventions. Despite the USD surging against 19 out of 28 pairs, based on Exante Data, the Philippine peso stood out by defying this trend, delivering the most outstanding return on December 26th. It was a mixed showing for the other ASEAN currencies. (Figure 1, middle table)

On that day too, the USDPHP traded at its lowest level from the opening and throughout the session, with depressed volatility—a clear indication of an intraday price ceiling set by the market maker, or possibly the BSP. (Figure 1, lowest graph)

By the last trading day of the year, the USDPHP weakened further, resulting in an impressive 1.64% decline over three trading sessions!

Figure 2

Notably, the Philippine peso emerged as the best-performing Asian currency during the final trading week of the year. Still, the USDPHP delivered a 4.47% return compared to the PSEi 30’s 1.22%. (Figure 2)

Figure 3

Over the past 12 years, the USDPHP has outperformed the PSEi 30 in 9 of them. Given its current momentum, this trend is likely to persist into 2025. (Figure 3, upper chart)

It is crucial to understand that such price interventions are not innocuous; they have lasting effects on the market and the broader economy.

II. A Brief History of the USDPHP's Soft Peg

The BSP employed a ‘soft peg’ or limited the rise of the USDPHP back in 2004-2005 (56.4 in 2004 and 56 in 2005).  (Figure 3, lower image)

Because of the relatively clean balance sheet following the post-Asian Crisis reforms, the BSP seemed successful—the peso rallied strongly from 2005 to 2007.

Despite the interim spike in the USDPHP during the Great Financial Crisis (GFC), it fell back to the 2007 low levels in 2013. This episode marked both the culmination of the strength of the Philippine peso and its reversal: the 12-year uptrend for the USDPHP.

Figure 4

Thanks to the expanded deployment of new tools called Other Reserve Assets (ORA), the BSP managed to generate substantial gains for the Philippine peso from 2018 to 2021. (Figure 4, upper window)

ORA includes financial derivatives (forwards, futures, swaps, and options), repos, and other short-term FX loans and assets.

However, this did not last, as the BSP launched a multi-pronged bailout of the banking system in response to the pandemic recession. The bailout comprised Php 2.3 trillion in injections (Quantitative Easing via Net claims on Central Government), aggressive RRR cuts, historic interest rate reductions, and various capital and regulatory relief measures, including subsidies. (Figure 4, lower diagram)

The USDPHP soared by about 5.4% from its 2004-2005 cap to reach the 59 level, marking the second series of its soft peg.

The USDPHP hit the 59 level four times in October 2022.

This second phase of USDPHP soft peg signified a part of the pandemic bailout measures.

Fast forward today, as the BSP maintained its implicit support via relatively elevated net claims on central government (NCoCG), the USDPHP’s 2023 countertrend rally was short-lived and rebounded through June 2024.

Promises of easy money from both the US Fed and the BSP sent a risk-on signal for global assets, including those in the Philippines sent the USDPHP tumbling to its low in September 2024.

Unfortunately, renewed signs of ‘tightening’ sent it re-testing the 59 levels three times in November-December 2024.

In short, despite recent interventions to maintain the 59 level, the numerous attempts to breach it signal the growing mismatch between the BSP’s soft peg and market forces.

III. USDPHP Peg: Tactical Policy Measures: Magnifying Systemic Risks

Yet, the BSP’s upper band limit signifies a subsidy on the USD or a price distortion that undervalues the USD while simultaneously overvaluing the peso.

This policy impacts the economy in several significant ways.

Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap.

Figure 5

It is no surprise that the trade deficit hit its all-time high in the second half of 2022 as the BSP cap went into effect.

Meanwhile, in October 2024, the trade deficit reached its third highest on record, following the USDPHP run-up through June 2024 with a quasi-upper band limit of 58.8-58.9. The USDPHP hit the 59 level twice in October. (Figure 5, upper chart)

Reduced Tourism Competitiveness: Second, an artificially strong peso (due to the cap) could make the Philippines a more expensive destination for tourists. This could reduce the country’s competitiveness in the tourism sector, ultimately impacting tourism revenue negatively.

Resource Misallocation: Third, prolonged price distortions lead to resource misallocations. In the short term, an overvalued currency might fuel consumption-driven growth due to cheaper imports. However, businesses may over-import because of the cheap USD, while exporters face challenges, with some potentially shutting down, resulting in job losses.

Over time, this could lead to overinvestment in import-related and dependent sectors while underinvestment could spur declining competitiveness in exports and tourism-related industries. These represent only the first-order effects.

The intertemporal ripple effects extend through supply and demand chains, compounding the long-term economic impact.

Inflation Risks: Fourth, the policy could exacerbate domestic inflation. While one goal of the cap is to suppress rising import costs, dwindling reserves make defending the cap increasingly difficult. Once reserves are depleted, the risk of abrupt devaluation grows, potentially defeating the policy’s original purpose.

Reduced Foreign Direct Investment (FDI): Fifth, pricier peso assets and heightened inflation risks translate to higher ‘hurdle rates’ for Foreign Direct Investments (FDI). This diminishes competitiveness and results in slow or stagnant FDI inflows, hindering long-term economic growth. Since peaking in December 2021, FDI flows have been stagnating and have shown formative signs of a downtrend since falling most last September 2024. (Figure 5, lower graph)

Increased Market Volatility: Sixth, the artificial ceiling could inadvertently magnify market volatility. Although designed to maintain stability, the widening misalignment between the USDPHP and economic fundamentals may prompt speculative pressures. If markets perceive the cap as unsustainable, the result could be a destabilizing devaluation. 

Capital Flight and Financial Instability: Finally, the growing perception of an imminent, sharp devaluation might spur capital flight from prolonged price controls, increasing the risks of financial instability. 

The Long-Term Costs of Short-Term Policies: Tactical policy measures, such as an artificial cap, magnify risks over time. These stop-gap measures are not "free lunches." Instead, they increase economic inefficiencies, contribute to stagnation, and amplify systemic risks. 

IV. The Cost of Cheap Dollars: Financing Challenges and Soaring External Debt 

On top of that, there is the critical issue of financing. 

>By keeping the dollar artificially cheap, authorities ENCOURAGE USD debt accumulation. This policy may amplify medium- to long-term vulnerabilities, particularly in the face of rising global interest rates or a stronger dollar. 

>Depleting Reserves and Surging External Debt: The artificial ceiling requires substantial central bank intervention through the use of foreign reserves. However, prolonged interventions deplete these reserves and may compel the government to borrow externally to replenish them, thereby increasing public debt. 

Unsurprisingly, external debt soared in Q3 2024. 

What’s more, since the National Government’s (NG) net foreign currency deposits with the BSP include proceeds from the NG's issuance of ROP Global Bonds, external debt inflates the BSP’s Gross International Reserves (GIR).

Figure 6 

Still, the level and growth of Q3 external debt continue to outpace the GIR. (Figure 6, topmost image) 

As a side note, GIR fell by USD 2.6 billion to USD 108.5 billion last November.

>Increasing Refinancing and Liquidity Strains:

As I recently noted, 

rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Prudent Investor, November 2024)

Increasing requirements for refinancing have only magnified the US dollar shortage, amplifying a race to borrow that heightens the risk of abrupt exchange rate adjustments or repayment shocks.

Additionally, banks (+34.14% YoY) and non-financial institutions (+5.5%) have also been ramping up their external debt. However, government borrowings (+18.7%) continue to outpace those of the private sector (in mil USD). (Figure 6, middle diagram) 

>Growing Short-Term Debt Concerns: Worse yet, while the BSP describes the present growth pace of external debt as "sustainable," short-term external debt has hit a record, and its share of the total has also expanded in Q3. (Figure 6, lowest window) 

The rapid rise in short-term debt is a symptom of mounting US "dollar shorts" or developing liquidity strains, which are likely to be magnified by the BSP’s caps. 

>Rising Debt Crisis Risk: Although one implicit objective of maintaining a USDPHP cap is to artificially lower the cost of debt servicing, the removal of this cap or an eventual devaluation could cause the cost of servicing foreign-denominated debt to skyrocket in local currency terms, potentially triggering a debt crisis. 

Figure 7

Eleven-month debt servicing costs have already hit a record (compared with same period and against the annual), partly due to the increasing share of foreign-denominated debt. Imagine where these costs would land if the USDPHP exchange rate breaches the 60 level!

V. USDPHP Peg: The Other Consequences

And that’s not all. 

The artificial peg may lead to additional consequences:

>Moral Hazard: Economic actors might engage in risky financial behavior, such as excessive USD borrowing, expecting government intervention to shield them from losses by perpetually maintaining a cheap dollar policy.

>Policy Tradeoffs: The BSP’s prioritization of exchange rate stability could worsen imbalances brought about by past and present monetary policy stances.

>Black Market Emergence: As USD supply becomes restricted due to prolonged interventions, a parallel or black market for the dollar may emerge.

>Social Inequality: The benefits of an artificially cheap dollar often skew toward wealthier individuals, who gain access to inexpensive foreign goods and international investment opportunities. In contrast, low-income households may face rising prices for basic goods—especially domestically produced ones—because local producers struggle with higher input costs or reduced competitiveness. 

>Economic Inequality: Moreover, such policies disproportionately favor certain groups, such as importers or holders of foreign currency-denominated assets (and related industries), and USD borrowers, at the expense of others, including exporters, local producers and savers.

>Trade Relations and Currency Manipulation Risks: A significant trade deficit driven by an undervalued dollar could strain trade relationships, potentially inviting retaliatory measures from trading partners or complicating trade negotiations. 

In extreme cases, accusations of "currency manipulation" could lead to sanctions by organizations such as the WTO. These sanctions might allow affected countries to impose tariffs on imports from the Philippines. 

All these factors point to one conclusion: the USDPHP is likely headed past 60 soon.

____

References

Prudent Investor US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar November 25, 2024

 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

 

Deficits are always a spending problem, because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increased every year—Daniel Lacalle

In this issue

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect?

V. Record 10-Month Expenditure: The Push for "Big Government"

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

VII. Rising Foreign Denominated Debt Payments!

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

IX. Q3 2024: Public Debt to GDP rises to 61.3%

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status 

Improvements in the 10-month fiscal balance have fueled the Philippine government’s unrealistic fixation on achieving 'Upper Middle Income' status—here's why. 

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints 

Inquirer.net, November 28: A double-digit revenue growth helped swing the government’s budget position back to a surplus in October, keeping the 10-month fiscal deficit below the 2024 ceiling set by the Marcos administration. The government ran a budget surplus of P6.3 billion in October, a reversal from the P34.4- billion deficit recorded a year ago, figures from the latest cash operations report of the Bureau of the Treasury (BTr) showed. 

Most media outlets barely mention that recent changes in tax collection schedules have distorted the Bureau of the Treasury’s reporting data. 

As noted in September, these adjustments significantly impact the perception of fiscal performance. 

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. 

Therefore, we should anticipate either a surplus or a narrower deficit this October. (Prudent Investor, October 2024)

Figure 1 

For instance, October’s surplus of Php 6.34 billion underscores how the quarterly revenue cycle boosts collections at the start of every quarter, often leading to either a surplus or a narrowed deficit. Surpluses were observed in January, April, and October this year. (Figure 1, topmost chart) 

However, as the government pushes to meet its year-end 'budget execution' targets in December, a significant spike in the year-end deficit could emerge from the remaining spending balance. 

Based on the budget allocation for 2024 amounting to Php 5.768 trillion, the unspent difference from the ten-month spending of Php 4.73 trillion is Php 1.038 trillion. 

Notably, in contrast to previous years, 2024 has already experienced three months of public spending exceeding Php 500 billion, with December still underway. (Figure 1, middle image) 

On the other hand, this could indicate a potential frontloading of funds to meet year-end targets. 

While spending excesses are constrained by law, the government has consistently exceeded enacted budget allocations since 2019. (Figure 1, lowest diagram) 

Consequently, this trend, shaped by political path dependency, suggests that the remaining Php 1.038 trillion could likely be surpassed. 

According to the Department of Budget and Management (DBM), budget adjustments are permissible under specific conditions: (DBM, 2012) 

1.    Enactment of new laws,

2.    Adjustments to macroeconomic parameters, and

3.    Changes in resource availability. 

These provisions may provide political rationales to justify increases in the allocated budget.

Figure 2

Expenditures, while down from last month, remain within their growth trajectory, while revenues have so far outperformed expectations. (Figure 2, topmost graph)

Despite October’s 22.6% revenue growth contributing to a lower ten-month deficit—down from Php 1.018 trillion in 2023 to Php 963.9 billion—it remains the fourth largest on record.

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

What is seldom mentioned by mainstream media is that such deficits serve as "fiscal or automatic stabilizers," ostensibly for contingent or emergency (recession) purposes.

While authorities repeatedly propagate their intent to elevate the economy to "upper middle-income" status and attain a credit "A" rating soon, they fail to disclose that current political-economic conditions are still functioning under or reflect continued reliance on a "stimulus" framework.

In fact, as we keep pointing out, the Bangko Sentral ng Pilipinas (BSP)’s reserve requirement ratio (RRR) and interest rate cuts represent monetary measures, while authorities have ramped up fiscal measures or "Marcos-nomics stimulus" for their political agenda—namely, pre-election spending and a subtle shift toward a war economy, alongside centralization through increased public spending and an enlarged bureaucracy or "Big Government."

Finally, while expenditures adhere to programmed allocations and revenues fluctuate based on economic and financial conditions as well as administrative efforts, they remain inherently volatile.

Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond.

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout.

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability.

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

Let us now examine the details.

In October, public revenue surged by 22.6%, driven primarily by a 16.94% growth in tax revenues, with the Bureau of Internal Revenue (BIR) contributing 16.19% and the Bureau of Customs (BOC) 11.5%. Meanwhile, non-tax revenues soared by 87.7%, largely due to revenues from other offices, including "privatization proceeds, fees and charges, and grants."

These activities boosted the 10-month revenue growth from 9.4% in 2023 to 16.8% this year, largely driven by a broad-based increase, largely powered by non-tax revenues.

It is worth noting that, despite reaching a record high in pesos, the BIR’s net income and profit growth significantly softened to 8.3%, the lowest since 2021, remaining consistent with the 9-month growth rate.  This segment accounted for 50% of the BIR’s total intake. (Figure 2, middle pane)

In contrast, sales taxes jumped by 30.6% over the first 10 months, marking the highest growth rate since at least 2017, and represents 30% of the BIR’s total revenues. Sales taxes vaulted by 31.6% in the first 9 months. (Figure 2, lowest chart)

The reason for focusing on the 9-month performance is to compare its growth rate with that of the PSEi 30, allowing for a closer understanding or providing a closer approximation of the BIR's topline performance.

Figure 3

Unfortunately, when using same-year data, the PSEi 30 reported a 9-month revenue growth of 8.1%, the slowest since 2021. This pattern is echoed in its net income growth of 6.8%, which is also the most sluggish rate since 2021. (Figure 3 upper window) 

To put this in perspective, as previously discussed, the 9-month aggregate revenues of the PSEi 30 represent approximately 27.9% of the nominal gross domestic product (NGDP) for the same period. 

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect? 

In its September disclosure, the Bureau of the Treasury cited changes in the VAT schedule as a key factor boosting tax collections: " The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return" (Bureau of Treasury, October 2024) [bold added] 

Once again, the adjustment in VAT schedules played a pivotal role in increasing revenues, helping to reduce the deficit and debt—a topic we discussed in September 2024 (Prudent Investor, September 2024). 

Or, whether by design or as an unintended consequence, a critical factor in the slower deficit has been a shift in government tax collection and accounting procedures. 

But what will happen if, under the same economic conditions or with only slight improvements, the effects of such transient changes wear off? Will the deficit soar again? 

Moreover, it is important to note that all this is occurring while bank credit expansion and public debt are at record highs. 

What will happen to credit and liquidity-fueled demand once household and corporate balance sheets become saturated with leverage? 

It’s also noteworthy that, even as the share of revenue to nominal GDP (NGDP) reached its highest level in Q2 and Q3 of 2024, real GDP continues its downward trend—a dynamic that has persisted since 2016 and reemerged in 2021. (Figure 3, below graph) 

Are these not symptoms of the "crowding-out effect," where the increasing share of government interventions, measured by expenditures, debt, and deficits, translates into diminished savings and capital available for private sector investments? 

V. Record 10-Month Expenditure: The Push for "Big Government" 

But what about expenditures? 

Local Government Unit (LGU) spending surged by 11.97%, and national disbursement growth reached 14.3%, powering an overall increase in October expenditures of 11.1%. Interest payments, on the other hand, fell by 6.1%. The former and the latter two accounted for shares of 18.1%, 66.64%, and 11.9% of the total, respectively.

For the first 10 months of the year, expenditures grew by 11.5%, reaching a record-high Php 4.73 trillion, driven by LGU spending, National disbursements, and interest payments, which posted growth rates of 9.1%, 11.9%, and 23.03%, respectively.

As noted above, these record expenditures are primarily focused on promoting political agendas: pre-elections, a subtle shift towards a war economy, and an emphasis on centralization through infrastructure, welfare, and bureaucratic outlays.

Figure 4

One notable item has played a considerable role: 10-month interest payments not only outperformed other components in terms of growth but also reached a record high in peso terms. (Figure 4, topmost graph) 

Additionally, their share of total expenditures rose to levels last seen in 2009. 

That said, the ratio of expenditures to NGDP remains at 23.98% in Q2 and Q3 and has stayed within the range of 22% to 26%—except for two occasions—since Q2 2020. (Figure 4, middle chart) 

Over the past 18 quarters, this ratio has averaged 23.4%. 

As mentioned above, despite all the hype about achieving "upper middle income" status and attaining a "Class A" credit rating, the Philippines continues to operate under a fiscal stimulus framework, which has only intensified with recent policies which I dubbed as "Marcos-nomics stimulus."

In the timeless words of the distinguished economist Milton Friedman, "Nothing is so permanent as a temporary government program."

Current conditions also validate the "Big Government" theory articulated by the economist Robert Higgs, particularly regarding what he termed "The Ratchet Effect." This concept refers to the "tendency of governments to respond to crises by implementing new policies, regulations, and laws that significantly enhance their powers. These measures are typically presented as temporary solutions to address specific problems. However, in history, these measures often outlast their intended purpose and become a permanent part of the legal landscape." (Matulef, 2023)

The push towards "Big Government" is evident, with approximately a quarter of the statistical economy deriving from direct government expenditures.

This figure does not include the indirect contributions from private sector participation in government activities, such as public-private partnerships (PPPs), suppliers, outsourcing and etc. 

As a caveat, the revenue and expenditure-to-NGDP ratio is derived from public revenue and spending data and nominal GDP—an aggregate measure where government spending is calculated differently—potentially leading to skewed interpretations of its relative size. 

In any case, as the government grows, so too does its demand for resources and finances—all at the expense of the private sector, particularly micro, small, and medium enterprises (MSMEs), as well as the purchasing power of the average Filipinos, represented here as Pedros and Marias. 

While government fiscal health may provide some insights into its size, there are numerous hidden or immeasurable costs associated with its expansion: compliance costs, public sector inefficiencies, regulatory and administrative burdens, policy uncertainty, moral hazard, opportunity costs, reduced incentives for innovation, deadweight losses, productivity costs, economic distortions, social and psychological costs, and more.

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

Rising interest payments represent some of the symptoms of "Big Government."

What’s remarkable is that, in just the first 10 months of 2024, the cost of servicing debt (amortization plus interest) soared to an all-time high of Php 1.86 trillion—16% higher than the previous annual record of Php 1.603 trillion set in 2023. And there are still two months to go! (Figure 4, lowest visual)

Amortization and interest payments exceeded their 2023 annual figures by 25.3% and 1.65%, respectively. 

Notably, amortization payments surged by a staggering 760% in October alone, reaching Php 161.5 billion.

As a result, amortization and interest payments have already surpassed their full-year 2023 totals. However, because the government categorizes amortizations (or principal payments) as financing rather than expenditures, they are not included in the budget.

VII. Rising Foreign Denominated Debt Payments!

There's more to consider.

Figure 5

Payments (amortization + interest) on foreign-denominated debt in the first 10 months of 2024 increased by 52%, reaching a record high. This brought their share of total payments to 21.9%, the highest since 2021. (Figure 5, topmost chart)

Unsurprisingly, the government borrowed USD 2.5 billion in the end of August, likely to refinance existing obligations. Adding to this, authorities reportedly secured another $500 million loan from the Asian Development Bank last week in the name of "climate financing."

Nonetheless, these serve as circumstantial evidence of increased borrowing to fund gaps, reflecting the "synthetic dollar short" position discussed last week.

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

Here’s where mainstream narratives often place emphasis: a slower deficit translates into slower growth in public debt. (Figure 5, middle graph)

In other words, a decrease in financing requirements or a reduction in the rate of increase in public debt decreases the debt/GDP ratio.

Authorities are scheduled to announce public debt data next week.

The apparent gaslighting of fiscal health suggests that authorities are employing tactical measures to improve macroeconomic indicators temporarily. These efforts seem aimed at buying time, likely in the hope that the economy will gain sufficient traction to mask structural weaknesses.

Still, while public debt continues to rise—albeit at a slower pace—bank financing of public debt through net claims on the central government (NCoCG), which began in 2015, appears to have temporarily plateaued. At the same time, the BSP's direct financing of the national government seems to have stalled. (Figure 5, lowest image)

However, none of these emergency measures have reverted to pre-pandemic levels.

The government shows no indication of weaning itself off the stimulus teats.

IX. Q3 2024: Public Debt to GDP rises to 61.3%

Unfortunately, the record savings-investment gap underscores a troubling reality: the GDP is increasingly propped up by debt.

While mainstream narratives highlight the prospect of a lower public debt-to-GDP ratio, they often fail to mention that public debt does not exist in isolation.

In the aftermath of the Asian Financial Crisis, the Philippine economy underwent a cleansing of its balance sheet, which had been marred by years of malinvestment. When the Great Financial Crisis struck in 2007-2008, the Philippine economy rebounded, aided by the national government’s automatic stabilizers and the BSP's easing measures.

However, during that period, the BSP mirrored the Federal Reserve's policy playbook, prompting the private sector to absorb much of the increased borrowing. This reduced the economy’s reliance on deficit-financed government spending and shifted the debt burden from the public to the private sector, enabling a decline in the public debt-to-GDP ratio.

Today, however, this is no longer the case.

Figure 6

Following the pandemic-induced recession, where bank credit expansion slowed, the government stepped in to take the reins, driving public debt-to-GDP to surge. As of Q3, it remained at 61.3%—the second highest level since 2021’s peak of 62.6% and the highest since 2004. 

Currently, despite high-interest rate levels, both public borrowing and universal commercial bank lending have been in full swing—resulting in a systemic leverage ratio (public debt plus universal commercial bank credit) reaching 108.5% of nominal GDP in 2023. 

This means that the government, large corporations, and many households with access to the banking system are increasingly buried in debt.  

In any case, debt is perceived by consensus as a "free lunch," so you hardly ever hear them talk about it. 

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

In conclusion, while current fiscal metrics may appear to show surface-level improvements, the government remains addicted to various free-lunch policies characterized by easy money stimulus. 

The government and elites will likely continue to push for a credit-driven savings-investment gap to propel GDP growth, leading to further increases in debt levels and necessitating constant liquidity infusions that heighten inflation risks. 

The establishment tend to overlook the crowding-out effects stemming from government spending (and centralization of the economy), which contribute to embedding of the "twin deficits" that require more foreign financing—ultimately resulting in a structurally weaker economy. 

The relentless pursuit of "upper middle income" status resembles a futile obsession—a "wet dream" driven more by the establishment’s obsession with benchmarks manifesting social signaling than substantive progress. 

For distributional reasons (among many others), the GDP growth narrative does not reflect the true state of the economy. 

Persistent self-rated poverty and hunger, widening inequality, elevated vacancies in the real estate sector, low savings rates, and stagnating productivity are clear indicators that GDP number benefits a select few at the expense of many. This, despite debt levels soaring to historic highs with no signs of slowing. 

Even the Philippine Statistics Authority’s (PSA) per capita consumer and headline GDP trendlines contradict the notion of an imminent economic or credit rating upgrade. 

While having the U.S. as a geopolitical ally could offer some support in the pursuit of cheaper credit through a potential credit upgrade, it is important to acknowledge that actions have consequences—meaning the era of political 'free lunches' are numbered. 

And do authorities genuinely believe they can attain an economic upgrade through mere technical adjustments of tax schedules and dubious accounting practices, akin to the "afternoon delight" and 5-minute "pre-closing pumps" at the PSEi 30? 

Yet because the political elites benefit from it, trends in motion tend to stay in motion, until… 

___

References 

Prudent Investor, September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso October 28, 2024 

Department of Budget and Management, THE BUDGETING PROCESS, March 2012, dbm.gov.ph

Bureau of Treasury, September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024, treasury.gov.ph

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024

Michael Matulef Beyond Crisis: The Ratchet Effect and the Erosion of Liberty, August 18, 2023, Mises.org