Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

 

The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch -- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference—that threatens to impoverish us by further destroying the value of our dollars—Dr. Ron Paul 

In this issue:

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

I. Public Spending: A Rising Floor, Not a Ceiling

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era

IV. Revenue Shortfalls: The Weakest Link

V. Crowding Out: Public Revenues at the Expense of the Private Sector

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind

VII. Debt Servicing: A Growing Burden

VIII. Foreign Borrowing: A Risky Trajectory

IX. Savings and Investment Gap: The Twin Deficits

X. Twin Deficit Structure

XI. Mounting FX Fragility and Systemic Risks

XII. Fiscal Strain Reflected in the Banking and Financial System

XIII. Bank Liquidity Drain and Risky Credit Expansion

XIV. Conclusion: A Fragile Political Economy  

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power 

A record Php 478.8 billion deficit, driven by soaring spending and slowing revenues, exposes deepening fiscal imbalances and a dangerous shift toward centralized power, increasing risks to the Philippines’ economic stability         

Inquirer.net, May 01, 2025: "The Philippine government in March registered its largest budget deficit in 15 months as revenues contracted amid strong growth in spending. The state’s fiscal shortfall had widened by 91.78 percent year-on-year to P375.7 billion in March, according to the latest cash operations report of the Bureau of the Treasury (BTr). This was the biggest budget gap since the P400.96-billion deficit in December 2023. That sent the fiscal gap in the first quarter to P478.8 billion, 75.62 percent bigger than the shortfall recorded a year ago." (bold mine)

The establishment’s talking heads and pundits tend to gloss over unpalatable economic data, but let us fill in the blanks. 

This article dissects the Q1 2025 fiscal performance, highlighting the record deficit, shifting political power dynamics, and underlying economic vulnerabilities.

I. Public Spending: A Rising Floor, Not a Ceiling 

In March, we noted: "This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending." (Prudent Investor, March 2025) 

The 2025 enacted budget of Php 6.326 trillion translates to an average monthly expenditure of Php 527 billion.

Figure 1

However, public spending in March 2025 soared to Php 654.98 billion—the second-highest on record, surpassed only by December 2023’s Php 661.03 billion. Excluding seasonal December spikes, March 2025 set a new benchmark or a new high for monthly expenditure. (Figure 1, topmost window)

For Q1, public spending hit Php 1.477 trillion, representing 23.35% of the annual budget. This translates to a monthly average of Php 492.33 billion—Php 34.84 billion short of the official target. Nonetheless, Q1 spending ranked as the sixth-largest quarterly expenditure in history.

This aggressive spending pace underscores a pattern observed over the past six years, where the executive branch consistently overshoots the enacted budget. (Figure 1, middle image) 

Based on this path dependency, the Php 527 billion monthly average should indeed be considered a floor, with monthly expenditures likely to hit Php 600–700 billion—or higher—in subsequent months to meet or exceed the annual target.

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

Beyond the numbers lies a profound political shift. As we highlighted in March:

"More importantly, this repeated breach of the ‘enacted budget’ signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025) 

The consistent overspending suggests that Congress has implicitly ceded control over the power of the purse to the executive. 

This erosion of legislative oversight effectively consolidates political supremacy in the executive branch, rendering elections a formality in the face of centralized fiscal authority. 

Indeed, the executive’s growing control over the budget illustrates the erosion of democratic checks and balances among the three branches of the Philippine government. 

The widening gap between actual and allocated spending serves as a tangible indicator of this power shift, with the executive branch wielding increasing discretion over national resources. 

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era 

The Q1 2025 budget deficit of Php 478.8 billion represents an All-Time high, surpassing even the deficits recorded during the pandemic-induced recession. (Figure 1, lowest diagram) 

It ranks as the sixth-largest quarterly deficit in history and the largest non-seasonal (non-Q4) shortfall. 

Annualized, this deficit projects to Php 1.912 trillion—14.5% above 2021’s record of Php 1.67 trillion! 

This alarming trajectory signals deepening fiscal imbalances, driven by a combination of unrestrained spending growth and the increasing prospect of faltering revenues. 

IV. Revenue Shortfalls: The Weakest Link 

As we observed last December: 

"Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending." (Prudent Investor, December 2024)

Figure 2

Q1 2025’s fiscal gap was exacerbated by a 22.4% year-on-year surge in expenditures—the highest since Q2 2020—coupled with a revenue shortfall. (Figure 2, topmost chart) 

March revenues contracted by 3.1%, dragging Q1 revenue growth down to 6.9%, a sharp slowdown from previous quarters. 

Importantly, the shift to quarterly VAT reporting distorts monthly fiscal data, making end-of-quarter figures critical for assessing fiscal health. 

Breaking down the revenue components: 

-Bureau of Internal Revenue (BIR): Collection growth decelerated slightly from 17.2% in 2024 to 16.7% in Q1 2025, reflecting steady but insufficient tax performance to close the spending gap. 

-Bureau of Customs (BoC): Growth improved from 2.4% to 5.7%, potentially driven by frontloaded exports and imports in anticipation of U.S. tariff policies under US President Trump. This trade dynamic may also bolster Q1 2025 GDP figures. 

-Non-Tax Revenues: Non-tax revenues plummeted by 41.21%, contributing only Php 66.7 billion in Q1 2025. The Bureau of the Treasury (BTr) attributes this to delayed GOCC dividend remittances, with only three GOCCs remitting Php 0.027 billion in Q1 2025 compared to 18 GOCCs contributing Php 28.23 billion in Q1 2024. The BTr expects non-tax revenues to recover starting May 2025 as GOCC dividends resume. (BTr, April 2025) (Figure 2, middle graph) 

This drastic reduction in GOCC remittances accounts for the bulk of the non-tax revenue shortfall, pulling the total revenue share down to 6.68%—the lowest since at least 2009. Since 2009, non-tax revenues have averaged a 12.4% share of total revenues, underscoring the severity of the Q1 2025 decline. 

The heavy reliance on non-tax revenues through volatile GOCC dividends exposes a structural vulnerability in fiscal planning. Delays in remittances, whether due to operational inefficiencies or governance issues within GOCCs, amplified the Q1 2025 deficit, forcing the government to draw on cash reserves and increase borrowing to bridge the gap. 

The broader implications are concerning. Tax collections from the BIR and BoC, while still growing, are insufficient to offset aggressive expenditure growth. The dependence on non-tax revenue windfalls introduces heightened unpredictability, as future shortfalls could exacerbate fiscal pressures if GOCCs underperform or remittances are further delayed. 

V. Crowding Out: Public Revenues at the Expense of the Private Sector 

Moreover, potential weaknesses in the economy or tax administration could lead to a substantial deceleration in tax revenue collections from the BIR and BoC, further widening the fiscal gap. 

More critically, this revenue crunch highlights a profound economic trade-off: the government’s growing resource demands, through taxes and non-tax collections, divert funds from the private sector, undermining productivity and long-term growth—a phenomenon known as the crowding-out effect.

Compounding these challenges, the inability or failure of near-record employment rates and unprecedented (Universal-commercial) bank credit expansion to significantly boost revenues signals softening domestic demand. (Figure 2, lowest visual) 

In fact, a chart highlighting the growing gap between public revenues and universal bank lending signals an increasing reliance on credit to drive GDP growth and sustain public coffers.

Figure 3

Declining core CPI, rising real estate vacancies, record-high hunger sentiment, and a decelerating GDP growth trajectory all indicate an economy struggling to convert nominal gains into sustainable fiscal outcomes. (Figure 3, topmost pane) 

If public revenue falters and the fiscal deficit explodes, the government may face heightened borrowing needs and rising interest rates, further straining fiscal health and increasing vulnerability to external economic shocks. 

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind 

The 2019 Mandanas-Garcia Ruling mandated a larger revenue share for Local Government Units (LGUs), yet national government (NG) expenditures have consistently outpaced LGU spending since 2022 under the Marcos administration. 

 In Q1 2025: 

-LGU expenditure growth slowed from 12.6% in 2024 to 11.3%, reducing their share of total spending from 21.5% to 19.6%. 

-NG expenditure growth surged from 5.4% to 25.25%, increasing its share from 60.3% to 61.71%. Key drivers included infrastructure projects (DPWH) and public welfare programs (DSWD) in March. (Figure 3, middle image) 

This divergence reflects a deliberate centralization of resources, concentrating fiscal and political power in the national government while diminishing LGU autonomy. 

The trend aligns with the broader shift of fiscal authority to the executive, further entrenching centralized control. 

VII. Debt Servicing: A Growing Burden 

In the meantime, interest payments, a primary component of debt servicing, reached a record high in Q1 2025. 

While their growth rate slowed from 35.9% in 2024 to 24.9% in 2025, their share of total expenditures rose from 16% to 16.32%. (Figure 3, lowest chart)

Figure 4

Amortization costs plummeted by 87.26%, reducing the total debt servicing burden by 65.3%. (Figure 4, topmost graph)

Mainstream narratives have previously portrayed this as a sign of fiscal improvement—but this is misleading.

The decline in debt servicing is merely a temporary reprieve. With the historic Q1 deficit, future borrowing—and therefore future debt servicing—will inevitably rise.

Moreover, the touted "fiscal consolidation" rests on a flawed assumption: that economically sensitive, variable revenues will increase in lockstep with programmed spending.

The Q1 2025 deficit necessitated a sharp increase in financing, with the Bureau of the Treasury’s borrowing doubling from Php 280.79 billion in 2024 to Php 644.12 billion this year. (Figure 4, second to the highest image)

While the Treasury’s Q1 2025 cash position reached historic highs, it returned to a deficit of Php 325.56 billion in March. This implies the need for increased short-term borrowing to meet immediate cash requirements.

If the deficit trend persists, full-year borrowing targets may need to be revised upward.

As evidence, Public debt surged by Php 319.257 billion month-on-month to a record Php 16.632 trillion in February 2025, marking a historic high. March data, expected next week, may reveal further escalation. (Figure 4, second to the lowest diagram)

This debt increase, driven by robust programmed spending and slowing revenue growth, underscores the deepening fiscal imbalance. 

Yet, the gap between the nominal figures of public debt and government spending continues to widen, reaching unprecedented levels and signaling heightened fiscal risks.

VIII. Foreign Borrowing: A Risky Trajectory

A notable shift in Q1 2025 was the increased reliance on foreign exchange (FX)-denominated share of debt servicing, which surged from 15% to 47.6% on increases in interest and amortization payments. (Figure 4, lowest pane)

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

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

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

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

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

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. 

IX. Savings and Investment Gap: The Twin Deficits 

The Philippine economic development model continues to rely heavily on a Keynesian-inspired spending paradigm. This framework is a core driver behind the record-breaking savings-investment gap. 

A key policy anchor supporting this model is the BSP’s long-standing easy money regime, which provides cheap financing primarily to the government and elite sectors. This is intended to stimulate spending through a trickle-down mechanism—boosting GDP while funding government projects, including those often criticized as boondoggles. 

However, this approach comes at a significant cost: it depresses domestic savings. 

Fiscal spending is an integral component of this paradigm. 

During the pandemic recession, the government’s role as a "fiscal stabilizer" expanded significantly, shaping GDP performance in the face of private sector weakness. 

However, government spending does not come without consequences. It competes with the private sector for scarce resources and financing, diverting them in the process. The result is structural supply constraints, forcing the economy to import goods to fill domestic shortages created by demand-side excess. 

Furthermore, the BSP’s USD-PHP foreign exchange ‘soft peg’ has the effect of overvaluing the peso and underpricing the dollar. This policy further fuels demand for imports and external financing, reinforcing the external deficit. 

X. Twin Deficit Structure

Figure 5

Unsurprisingly, this credit-fueled, trickle-down model has produced a classic “twin deficit” scenario—wherein fiscal imbalances are mirrored by trade deficits. (Figure 5, topmost visual)

As the budget gap soared to historic levels during the pandemic, the trade deficit also expanded to record levels.

With the current political and economic thrust toward centralization, this dynamic is unlikely to reverse. This reality highlights a structural barrier that undermines potential benefits from global trade shifts, such as those arising from Trump’s protectionist tariff regime.

Under Trump’s regime, the Philippines, with one of the region’s lowest tariff rates, remains structurally unprepared to capitalize, due to policies that prioritize consumption over investment, perpetuating reliance on imports and external financing—as previously discussed. 

Although the trade gap widened by 12.8% year-on-year in Q1 2025—from USD 11.264 billion to USD 12.71 billion—the all-time high in the fiscal deficit points to an even larger trade gap in the quarters ahead. This will only deepen the twin deficit conundrum. 

XI. Mounting FX Fragility and Systemic Risks 

Even with support from external borrowings, the growth of BSP’s net foreign assets has largely vacillated following multiple spikes in 2024. This suggests emerging limitations in the central bank’s ability to manage its FX operations effectively. (Figure 5, middle graph) 

Despite a recent rally in the Philippine peso—driven by broad dollar weakness and BSP interventions—fragilities from growing external liabilities remain as explained last week. 

These vulnerabilities are likely to magnify systemic risks, even as establishment economists—fixated on rigid quantitative models—fail to acknowledge them. 

XII. Fiscal Strain Reflected in the Banking and Financial System 

Fiscal strains are increasingly impacting the banking system, a dynamic the public scarcely recognizes.

The BSP and its cartelized network of financial institutions have engaged in inflationary financing.  Philippine banks have been absorbing a significant share of government securities through Net Claims on Central Government (NCoCG). (Figure 5, lowest chart) 

These claims, representing banks’ holdings of government debt, peaked at Php 5.54 trillion in December 2024 but slipped to Php 5.3 trillion in February 2025, reflecting slight easing. 

Meanwhile, the BSP’s NCoCG, following the historic Php 2.3 trillion liquidity injections in 2020-21, remains elevated, fluctuating between Php 400 billion and Php 900 billion since 2023, underscoring its role in deficit financing.

Figure 6

Although the growth of NCoCG for Other Financial Corporations (OFCs), such as investment firms and insurers, has slowed since Q1 2024, it reached a record Php 2.491 trillion in Q3 2024 before declining to Php 2.456 trillion in Q4 2024. (Figure 6, topmost image) 

Notably, the surge in NCoCG for banks, OFCs, and the BSP began in 2019 and accelerated thereafter, coinciding with the "twin deficits." 

Essentially, the Q1 2025 fiscal deficit of Php 478.8 billion and trade deficit of USD 12.71 billion—highlights the financial sector’s entanglement with fiscal imbalances. 

XIII. Bank Liquidity Drain and Risky Credit Expansion 

Compounding this, the spike in the banking system’s record NCoCG has coincided with the all-time high in Held-to-Maturity (HTM) assets, government bonds held by financial institutions until maturity, which have significantly reduced banks’ liquidity. (Figure 6, middle chart) 

This led to the cash-to-deposits ratio hitting a historic low in February 2025, as banks locked funds in HTM assets to finance the government’s borrowing. (Figure 6, lowest graph) 

In response, the BSP has implemented a series of easing measures: two reductions in the Reserve Requirement Ratio (RRR) within six months, the doubling of deposit insurance in March 2025, and four policy rate cuts in eight months—officially marking the start of an easing cycle—as previously analyzed. 

In parallel, banks have ramped up lending, particularly to risk-sensitive sectors such as consumers, real estate, trade, and utilities. This credit expansion is often rationalized as a strategy to improve capital adequacy ratios in line with Basel standards. However, in practice, it raises sovereign exposure, increases sensitivity to interest rate fluctuations, and thereby amplifies credit, economic, and systemic risks. 

XIV. Conclusion: A Fragile Political Economy 

In sum, the buildup in fiscal risks is no longer confined to the government budget spreadsheets—it permeates into the broader economy and financial markets. 

As we concluded last March: "the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis." (Prudent Investor, March 2025) 

____ 

References 

Prudent Investor Newsletter, January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden March 23, 2025, Substack 

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025 Substack 

Prudent Investor Newsletter, October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends December 9, 2025 Substack 

Philippine Bureau of Treasury, Q1 Revenue Collections and Expenditures Sustain Growth, April 29, 2025 treasury.gov.ph

 

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

 

A country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power—Charles Calomiris and Stephen Haber

In this issue

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut

II. The Primary Beneficiaries of BSP’s Policies

III. The Impact of the BSP Monetary Policy Rates on MSMEs

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

V. Logical Contradictions in the Philippine Banking Data

VI. Slowing Bank Asset Growth

VII. Booming Bank Lending—Magnified by the Easing Cycle

VIII. Economic Paradoxes from the BSP’s Easing Cycle

IX. Plateauing Investments and Rising Losses

X. Mounting Liquidity Challenges in the Banking System

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost? 

As part of its ongoing easing cycle, the BSP cut rates for the fourth time in April 2025. The key question: who benefits? Clues point to trickle-down policies at work. 

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut 

The Bangko Sentral ng Pilipinas (BSP) initiated its easing cycle in the second half of 2024, implementing three rate cuts and reducing the banking system’s Reserve Requirement Ratio (RRR) in October 2024. 

This was followed by a second RRR reduction in March 2025, complemented by the doubling of deposit insurance by the Philippine Deposit Insurance Corporation (PDIC), a BSP-affiliated agency, in the same month. 

The latter was likely intended to boost depositor confidence in the banking system, given the rapid decline in banks’ reserves amid heightened lending and liquidity pressures. (previously discussed) 

Last week, the BSP announced its fourth rate cut—the first for 2025—bringing the policy rate to 5.5%. 

The BSP justified this latest cut by citing the easing of inflation risks and a "more challenging external environment, which could dampen global GDP growth and pose downside risks to domestic economic activity." 

But who truly benefits from these policies? 

Or, we ask: Cui bono? 

The answer naturally points to the largest borrowers: the Philippine government, elite-owned conglomerates, and the banking system. 

Let’s examine the beneficiaries and question whether the broader economy is truly being served. 

II. The Primary Beneficiaries of BSP’s Policies 

The BSP’s easing measures disproportionately favor the following:

Figure 1

A. The Philippine Government: Public debt surged by Php 319.26 billion to a record PHP 16.632 trillion in February 2025.  Debt-to-GDP ratio increased to 60.72% in 2024, up from 60.1% in 2023. (Figure 1, topmost image) 

While debt servicing data for the first two months of 2025 appears subdued, it accounted for 7.64% of nominal GDP in 2024—a steady increase from its 2017 low of 4.11%. Between 2022 and 2024, the debt servicing-to-GDP ratio accelerated from 5.87% to 7.64%, reflecting the growing burden of rising debt.

Lower interest rates directly reduce the government’s borrowing costs, providing fiscal relief at a time of record-high debt, but they also encourage more debt-financed spending, a key factor contributing to this all-time high.

B. Elite-Owned Conglomerates: Major corporations controlled by the country’s elites have also seen their debt levels soar. 

For instance, San Miguel Corporation’s 2024 debt increased by Php 154.535 billion to a record Php 1.56 trillion, while Ayala Corporation’s debt rose by PHP 76.92 billion to PHP 666.76 billion. 

Other member firms of the PSEi 30 have yet to release their annual reports, but Q3 2024 data shows that the non-financial debt of the PSEi 30 companies grew by Php 208 billion, or 3.92%, to PHP 5.52 trillion—equivalent to 16.6% of Total Financial Resources (Q3).

These conglomerates benefit from lower borrowing costs, enabling them to refinance existing debt or fund expansion at cheaper rates, but similar to the government, their mounting loan exposure diverts financial resources away from the rest of the economy, exacerbating credit constraints for smaller firms. 

C. The Philippine Banking System: The banking sector itself is a significant beneficiary. 

In February 2025, aggregate bonds and bills payable surged by Php 560.2 billion—the fourth-highest increase on record—pushing outstanding bank borrowings to PHP 1.776 trillion, the second-highest level ever, just below January 2025’s all-time high of PHP 1.78 trillion. (Figure 1, middle pane)

Ideally, lower rates and RRR cuts provide banks with cheaper funding and more lendable funds, boosting their profitability while easing liquidity pressures. But have they? 

These figures reveal the primary beneficiaries of the BSP’s policies: the government, elite conglomerates, and the banking system.

III. The Impact of the BSP Monetary Policy Rates on MSMEs

But what about the broader economy, particularly the micro, small, and medium enterprises (MSMEs) that form its backbone?

Republic Act 9501, the Magna Carta for MSMEs, mandates that banks allocate at least 8% of their total loan portfolio to micro and small enterprises (MSEs) and 2% to medium enterprises (MEs), based on their balance sheets from the previous quarter.

However, a recent report by Foxmont Capital Partners and Boston Consulting Group (BCG), cited by BusinessWorld, highlights a stark mismatch: despite MSMEs comprising 99.6% of all businesses in the Philippines, generating 67% of total employment, and contributing up to 40% of GDP, they accounted for only 4.1% of total bank lending in 2023—a sharp decline from 8% in 2010.

As of Q3 2024, the BSP reported a total compliance rate with the Magna Carta for MSMEs stood at just 4.6%. (Figure 1, lower graph)

Despite a boom in bank lending, many banks opt to pay penalties for non-compliance rather than extend credit to MSMEs.

This underscores a harsh reality: bank lending remains concentrated among a select few—large corporations and the government—while MSMEs continue to be underserved.

All told, the BSP's policies have minimal impact on MSMEs, highlighting their distortive distributional effects

The report further echoes a "trickle-down" monetary policy critique we’ve long emphasized: the Philippine banking system is increasingly concentrated. Over 90% of banking assets are held by just 20 large banks, while more than 1,800 smaller institutions, primarily serving rural areas, collectively control only 9% of total assets!

Figure 2

This concentration is evident in the universal and commercial banks’ share of total financial resources, which stood at 77.7% in January 2025, slightly down from a historic high of 77.9% in December 2024. (Figure 2, topmost diagram)

If the BSP’s policies primarily benefit the government, banks, and elite conglomerates rather than the broader economy, why is the central bank pushing so hard to continue its easing cycle? And what have been the effects of its previous measures?

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

One of the BSP’s stated reasons for the April 2025 rate cut was a decline in the Consumer Price Index (CPI), with March headline CPI at 1.8%.

However, authorities have done little to explain to the public the critical role that Maximum Suggested Retail Prices (MSRPs)—essentially price controls—played in shaping this decline.

First, the government imposed MSRPs on imported rice on January 20, 2025, despite rice prices already contracting by 2.3% that month. (Figure 2 middle chart)

The second phase of rice MSRPs was implemented on March 31, despite rice prices deflating.

Second, pork MSRPs were introduced on March 10, 2025.

Pork inflation, which peaked at 8.5% in February, slipped to 8.2% in March, despite a reported compliance rate of only 25% in the National Capital Region (NCR).

Notably, pork sold in supermarkets and hypermarkets was exempt from these controls, revealing an inherent bias of policymakers against MSMEs. Were authorities acting as tacit sales agents for the former?

Third, since the introduction of these quasi-price controls, headline CPI has declined faster than core CPI (which excludes volatile food and energy prices), which printed 2.2% in March. (Figure 2, lowest window)

Food CPI, with a 34.78% weighting in the CPI basket, has likely been a significant driver of this decline, more so than core CPI.

This divergence suggests that price controls artificially suppressed headline inflation, masking underlying price pressures.

Meanwhile, the falling core CPI points to weak consumer demand, a concerning trend given the Philippines’ near-record employment rates.

Figure 3

Finally, the Philippine treasury market appears to challenge the BSP’s narrative of controlled inflation at 1.8% in March 2025.

Yield data shows a subtle flattening in the mid-to-long section of the curve: yields for 2- to 5-year maturities dipped slightly (e.g., the 5-year yield fell by 2.8 basis points from February 28 to March 31), while the 10-year yield rose by 6.75 basis points, and long-term yields, such as the 25-year, declined by 3.15 basis points. (Figure 3, topmost image)

This flattening—driven by a narrowing spread between medium- and long-term yields—may reflect market concerns about economic growth and banking system liquidity.

Despite this, the overall yield curve remains steep last March, signaling that the market anticipates inflation risks in the future.

This suggests that Treasury investors doubt the sustainability of the BSP’s inflation management.

We suspect that authorities leveraged price controls to justify the rate cut, using the suppressed CPI as a convenient metric rather than a true reflection of economic conditions.

This raises questions about the BSP’s transparency and the real motivations behind its easing cycle.

V. Logical Contradictions in the Philippine Banking Data

When you make a successful lending transaction, you get back not only your capital but the interest with it. Less costs, this income represents your profits and adds to your liquidity (savings or capital).

When you make a successful investment transaction, you get back not only your capital but the dividend or capital gains with it. Less costs, this income also represents your profits and adds to your liquidity (savings or capital).

Applied to the banking system, under these ideal circumstances, declared profits should align with liquidity conditions, but why does this depart from this premise?

Let us dig into the details. 

VI. Slowing Bank Asset Growth 

Bank total assets grew by 8% year-over-year (YoY) in February 2025 to PHP 26.95 trillion, slightly below December 2024’s historic high of PHP 27.4 trillion.  (Figure 3, middle pane)

Despite the BSP’s easing cycle, the growth in bank assets has been slowing, a downtrend that has persisted since 2013. This decline in the growth of bank assets has mirrored the falling share of cash reserves.

The changes in the share distribution of assets illustrate the structural evolution of the Philippine banking system.

As of February 2025, lending, investments, and cash represented the largest share, totaling 92.6%, broken down into 54.5%, 28.8%, and 8.8%, respectively. (Figure 3, lowest visual)

Since 2013, the share of cash reserves has been declining, bank loans broke out of their consolidation phase in July 2024 (pre-easing cycle), while the investment share appears to be peaking.

VII. Booming Bank Lending—Magnified by the Easing Cycle

The Total Loan Portfolio (inclusive of Interbank Loans (IBL) and Reverse Repurchase Agreements (RRP)) grew by 12.3% in February 2025, slightly down from 13.7% in January.

Since the BSP’s historic rescue during the pandemic recession, bank lending growth has been surging, regardless of interest rate and Reserve Requirement Ratio (RRR) levels. The recent interest rate and RRR cuts have only amplified these developments.

Figure 4

Notably, bank lending growth has become structurally focused on consumer lending, with the Universal-Commercial share of consumer loans rising to an all-time high as of February 2025. (Figure 4, topmost graph)

This shift is partly due to credit card subsidies introduced during the pandemic recession. This evolution in the banks’ business model also points to an inherent proclivity toward structural inflation: producers are receiving less financing (leading to reduced production and more imports), while consumers have been supplementing their purchasing power, likely to keep up with cumulative inflation.

In short, this strategic shift toward consumption lending underlines the axiom of "too much money chasing too few goods."

The rising loan-to-deposit ratio further shows that bank lending has not only outperformed asset growth, but ironically, these loans have not translated into deposits. (Figure 4, middle chart)

Total deposit liabilities growth slowed from 6.83% in January to 5.6% in February, driven by a slowdown in peso deposits (from 6.97% to 6.3%) and a sharp plunge in foreign exchange (FX) deposit growth (from 6.14% to 2.84%). (Figure 4, lowest window)

Peso deposits accounted for 82.7% of total deposit liabilities. Ironically, despite the USD-PHP exchange rate drifting near the BSP’s ‘upper band limit’ or its ‘Maginot Line’, FX deposit growth has materially slowed.

VIII. Economic Paradoxes from the BSP’s Easing Cycle 

Paradoxically, despite near-record employment levels (96.2% as of February 2025) and stratospheric loan growth propelled by consumers, the GDP has been stalling, with Q3 and Q4 2024 underperforming at 5.2% and 5.3%, respectively.

Real estate vacancies have been soaring—even the most optimistic analysts acknowledge this—and Core CPI has been plunging (2.2% in March 2025, as mentioned above).

Figure 5

Meanwhile, social indicators paint a grim picture: SWS hunger rates in March have hit near-pandemic milestones, and self-rated poverty, affecting 52% of families, has rebounded in March after dropping in January 2025 to 50% from a 21-year high of 63% recorded in December 2024. (Figure 5, topmost image) 

In a nutshell, where has all the fiat money created via loans flowed? What is the black hole consuming these supposedly profitable undertakings? 

IX. Plateauing Investments and Rising Losses 

The plateauing of investments is highlighted by their slowing growth rates. 

Total Investments (Net) decelerated from 5.85% in January to 4.86% in February 2025. This slowdown comes in the face of elevated market losses, which remained at PHP 26.4 billion in February, down from PHP 38.1 billion a month ago. (Figure 5, middle diagram) 

Held-to-Maturity (HTM) securities accounted for the largest share of Total Investments at 52.22%, followed by Available-for-Sale (AFS) securities at 38.5%, and Financial Assets Held for Trading (HFT) at 5.6%. 

Despite the CPI’s sharp decline, backed by the BSP’s easing, elevated Treasury rates—such as the 25-year yield at 6.3%—combined with losses in trading positions at the PSE (despite coordinated buying by the "national team" which likely includes some banks—to prop up the PSEi 30 index) have led to losses in banks’ trading accounts. 

Clearly, this is one reason behind the BSP’s easing cycle.

Yet, HTM securities remain the largest source of bank investments.

In early March 2025, we warned that the spike in banks’ funding of the government via Net Claims on Central Government (NCoCG) would filter into HTM assets: 

"Valued at amortized cost, HTM securities mask unrealized losses, potentially straining liquidity. Overexposure to long-duration HTMs amplifies these risks, while rising government debt holdings heighten banks’ sensitivity to sovereign risk. 

With NCoCG at a record high, this tells us that banks' HTMs are about to carve out another fresh milestone in the near future. 

In short, losses from market placements and ballooning HTMs have offset the liquidity surge from a lending boom, undermining the BSP’s easing efforts." (Prudent Investor, March 2025)

Indeed, the NCoCG spike to a record PHP 5.54 trillion in December 2024 pushed banks’ HTM holdings above their previous high of PHP 4.017 trillion in October 2023, breaking the implicit two-year ceiling of PHP 4 trillion to set a fresh record of PHP 4.051 trillion in February 2025. (Figure 5, lowest pane) 

This increase raised the HTM share of assets from 14.7% in January to 15.03% in February. 

X. Mounting Liquidity Challenges in the Banking System

Figure 6

This new all-time high in HTM securities led to a fresh all-time low in the cash-to-deposit ratio, meaning that despite the RRR cuts, cash reserves dropped more than the slowdown in deposit growth would suggest. (Figure 6, topmost chart)

The banking system’s cash and due from banks fell 2.94% in February to PHP 2.37 trillion, its lowest level since June 2019, effectively erasing all of the BSP’s unprecedented PHP 2.3 trillion cash injection in 2020-21. (Figure 6, middle graph)

Moreover, the liquid assets-to-deposits ratio, another bank liquidity indicator, dropped to June 2020 levels. (Figure 6, lowest visual)

The BSP cut the RRR in October 2024, yet liquidity challenges continue to mount. What, then, will the March 2025 RRR cut achieve? While the BSP notes that bank credit delinquency measures—such as gross non-performing loans (NPLs), net NPLs, and distressed assets—have remained stable, it’s doubtful that HTM securities are the sole contributor to the liquidity challenges faced by the banking system.

Improving mark-to-market losses are part of the story, but with record credit expansion (in pesos) and an all-time high in financial leverage amid a slowing GDP, it’s likely that the banks’ unpublished NPLs are another factor involved.

Figure 7

Additionally, banks have increasingly relied on borrowing, with bills payable accounting for 67% of their outstanding debt. (Figure 7, upper graph)

Though banks have reduced their repo exposure with the BSP, interbank repos set a record high in February 2025, providing further signs of liquidity strains. (Figure 7, lower chart)

Banks have been aggressively lending, particularly to high-risk sectors such as consumers, real estate, and trade, to raise liquidity to fund the government.

However, this has led to a build-up of HTM securities and sustained mark-to-market losses for HFT and AFS assets.

Additionally, lending to high-risk sectors like consumers and real estate increases the risk of defaults, particularly in a slowing economy, which can strain liquidity if these loans become non-performing.

Moreover, this lending exacerbates maturity mismatches—for instance, when short-term deposits are used to fund longer-term real estate loans—amplifying the liquidity challenges as banks face immediate funding demands with potentially impaired assets.

While the BSP’s “relief measures” may understate the true risk exposures of the industry, the mounting liquidity challenges and the increasing scale and frequency of their combined easing policies have provided clues about the extent of these risks.

Borrowing from our conclusion in March 2025:

"The BSP’s easing cycle has fueled a lending boom, masked NPL risks, and propped up government debt holdings, yet liquidity remains elusive. Cash reserves are shrinking, deposit growth is faltering, and banks are borrowing heavily to stay afloat.

...

As contradictions mount, a critical question persists: can this stealth loose financial environment sustain itself, or is it a prelude to a deeper crisis?" (Prudent Investor March 2025)

Under these conditions, the true beneficiaries of the BSP’s easing cycle become clear: it is primarily a rescue of the elite owned-banking system. 

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

The BSP has used inflation and external challenges to justify its fourth rate cut in April 2025, part of an easing cycle that began in the second half of 2024. 

The sharp decline in the March CPI rate to 1.8%—potentially understated due to price controls through Maximum Suggested Retail Prices (MSRPs)—may have provided a convenient rationale. 

However, the data suggests a different story: increasing leverage in the public sector, elite firms, and the banking system appears to be the real driver behind the BSP’s easing cycle, which also includes RRR reductions and the PDIC’s doubling of deposit insurance. 

The evidence points to a banking system under strain—record-low cash reserves, a lending boom that fails to translate into deposits, and economic paradoxes like stalling GDP growth despite near-record employment. 

When the BSP cites a "more challenging external environment, which would dampen global GDP growth and pose a downside risk to domestic economic activity," it is really more concerned about the impact on the government’s fiscal conditions, the health of the elite-owned banking system, and elite-owned, too-big-to-fail corporations. 

This focus comes at the expense of the broader economy, as MSMEs remain underserved and systemic risks, such as unpublished NPLs and overexposure to government debt, continue to mount. 

As the BSP prioritizes a rescue mission for its favored few, one must ask: at what cost to the Philippine economy, and can this trajectory avoid a deeper crisis?

 

 

 

Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines

 

What the circus ringmaster really wants is an iron-clad mechanism – already being developed by his team – that unilaterally imposes whatever level of tariffs Trump may come up with on whatever excuse: could be to circumvent “current manipulation”, to counter a value-added tax, on “security grounds”, whatever. And to hell with international law. For all practical purposes, Trump is burying the WTO—Pepe Escobar  

In this issue

Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines

I. Introduction: A Tariff with Two Faces

II. Trump’s Sweeping Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty

III. U.S. Stock Market Meltdown Echoes the Smoot-Hawley Era and the Great Depression

IV. The Tariff’s Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political Win, But a Formidable Economic Challenge

V. Fallout from Tariffs: An Uncertain Future: Tariffs May Deter Investment in the Philippines

VI. Shaky Foundations: Why the Consumer Economy Isn’t Immune

VII. Financial Fragility: Historic Savings-Investment Gap, Record Debt, and Dollar Dependence

VIII. Intertemporal Impact or Short-to-Longer Term Impact on the Philippine Economy

IX. The US Dollar’s ‘Triffin Dilemma’: Global Risks and Philippine Challenges

X. Conclusion: Winnowing the Political Chaff from the Economic Wheat 

Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines 

Will the Philippines benefit from Trump's sweeping tariff reforms? The realities of the existing economic and political structure suggest otherwise. 

I. Introduction: A Tariff with Two Faces

Figure 1

On April 9, 2025, the United States imposed a 17% tariff on Philippine goods—a lighter burden compared to Vietnam’s 46% or Cambodia’s 49%. The Philippines was listed among the 'worst' tariff offenders against the US. (Figure 1, upper table) 

At first glance, this appears to be a political victory, offering the Philippines a chance to attract investment and outshine its ASEAN neighbors in a global trade war. 

Some experts even argue that because the Philippines is a consumption-driven economy, it would be less affected by the ongoing trade war, potentially insulating it from the worst of the fallout.

However, a closer examination reveals a far more challenging reality.

The Philippines faces deep-seated vulnerabilities: a heavy reliance on trade (42% of its 2024 GDP), a chronic savings shortage that hampers investment, and global risks that could destabilize the U.S.’s dollar dominance.

As the Philippines navigates this turbulent landscape, its ability to transform this political advantage into economic gains hinges on addressing these structural weaknesses amidst an uncertain global economic horizon.

II. Trump’s Sweeping Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty 

On April 3, 2025, President Trump declared a national emergency, citing the U.S.’s $1.2 trillion goods trade deficit in 2024 as a threat to national and economic security. This declaration, invoking the International Emergency Economic Powers Act (IEEPA), allowed the administration to impose reciprocal tariffs without Congressional approval, including a baseline 10% tariff on all countries. 

The Trump administration’s formula for these reciprocal tariffs—(trade deficit ÷ imports) ÷ 2—serves as a proxy for what they deem “unfair” trade practices.

This approach, however, oversimplifies the intricate politics of global merchandise trade. The U.S. trade deficit is not merely a result of unfair practices but a symptom of deeper structural dynamics, including the U.S. dollar’s role in the Triffin Dilemma, global easy money policies, various mercantilist practices by numerous nations and more.

The absurdity of using a one-size-fits-all metric like the trade deficit to define “unfair practices” is starkly illustrated by the Trump administration’s decision to impose tariffs on the remote Antarctic outpost of Heard and McDonald Islands. Inhabited primarily by penguins and seals, and unvisited by humans for nearly a decade, this territory faces tariffs despite a complete absence of economic activity.

Ironically, nations like Cuba, North Korea, Belarus, and Russia were exempted from these tariffs due to the absence of bilateral trade with the U.S., a result of existing sanctions. 

The Trump administration’s aggressive tariff regime has pushed U.S. effective tariff rates beyond those of the Smoot-Hawley era, a period infamous for exacerbating the Great Depression. (Figure 1, lower chart) 

As Cato’s Grabow, Lincicome and Handley recently wrote, "The result appears to be the highest US tariffs since 1909, already ten times the size of those in place before Trump took office and at an average rate exceeding even that imposed by the infamous Smoot-Hawley Act, which is widely blamed for prolonging the Great Depression."  (Cato, 2025) [bold added]        

This drastic policy shift—a potential abrupt reversal of globalization—introduces significant Regime Uncertainty (Higgs 1997), defined as the perceived lack of protection for property rights due to the unpredictability of government policies and institutional frameworks.

Regime uncertainty distorts economic calculations, obscuring the ‘hurdle rate’—the minimum return required to justify investment in viable projects.

Or it discourages investment by creating an opaque economic horizon where businesses cannot reliably predict future costs, revenues, or risks.

Figure 2

Measured as a trade policy uncertainty metric, regime uncertainty has rocketed to an all-time high, signaling a profound shift in the global economic landscape that could have far-reaching consequences for countries like the Philippines. (Figure 2) 

III. U.S. Stock Market Meltdown Echoes the Smoot-Hawley Era and the Great Depression 

It is hardly surprising that last week’s U.S. stock market meltdown—the largest two-day wipeout in history—serves as a stark symptom of these policy-induced uncertainties.

The regime uncertainty plaguing the economic horizon heightens the risk of profound economic weakness, disrupting supply chains, amplifying hurdles for capital flows and Foreign Direct Investment (FDI), magnifying credit delinquencies, and prompting path-dependent responses from central banks—involving "policy easing" to counteract economic slowdowns, which could also fuel inflation risks.

In combination, these factors raise the specter of a global recession or even a financial crisis.

Given the historic highs in global debt and leverage—amounting to $323 trillion as of Q3 2024, or 326% of global GDP, according to the Institute of International Finance—a stagflation-induced financial crisis could render the 2008 Global Financial Crisis a proverbial ‘walk in the park.’ 

Is history rhyming? 

David R. Breuhan offers a historical parallel: "The stock market collapse began on Oct. 28, 1929, as news spread that the Smoot Hawley Tariff Bill would become law. The front-page New York Times article read: ‘Leaders Insist Tariff Will Pass.’ Although the tariff bill didn’t become law until June 1930, its effects were felt eight months prior. Markets reacted immediately, as they discount future earnings. Most economists blame the gold standard for the crash, but this analysis misses the forward-looking nature of the human mind, which is the market itself. Markets need not wait for earnings to decrease due to imminent policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. Margin calls were made, further cascading the markets." (Breuhan, 2024) [bold added]

The parallels are striking. Today’s markets, burdened by high leverage and global debt, are reacting to the uncertainty of Trump’s tariff regime, much like they did to Smoot-Hawley nearly a century ago.

For the Philippines, this global financial instability could exacerbate the economic challenges posed by the tariff, as investors may grow wary of emerging markets amid a potential global downturn. 

IV. The Tariff’s Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political Win, But a Formidable Economic Challenge

Figure 3

A chart of U.S.-Philippines trade from 1985 to 2024 reveals a persistent trade deficit, peaking at $7 billion in 2022, underscoring the high stakes of this trade war for the Philippines. (Figure 3, upper window)

Trump’s reciprocal tariff exposes the country’s vulnerabilities: a heavy reliance on trade (42% of 2024 GDP), a savings shortage that stifles investment, and global risks that could upend the U.S.’s dollar dominance.

The 17% tariff on Philippine goods, part of President Trump’s strategy to shrink the $1.2 trillion U.S. trade deficit, appears to be a political win at first glance.

Compared to Vietnam’s 46% or Cambodia’s 49%, the Philippines seems to have dodged the worst of this trade war. Mainstream analysts have spun this as an opportunity: with a lower tariff, the Philippines could attract investors looking to shift supply chains away from pricier neighbors. 

Philippine Trade Secretary Cristina Roque even called it a chance to negotiate a sectoral free trade agreement with the U.S., potentially boosting market access. For a country eager to stand out in ASEAN, this lighter tariff feels like a rare edge.

But the economic reality paints a far more daunting picture. 

The Philippines faces formidable structural hurdles that could blunt this political advantage.  Here are some examples. 

1. Energy costs, for instance, are among the highest in the region at $0.20 per kWh—double Vietnam’s $0.10—making manufacturing less competitive (International Energy Agency, 2024). 

2. Regulatory complexity adds another layer of difficulty: the Philippines ranks 95th globally in the World Bank’s Ease of Doing Business Index, trailing Vietnam (70th) and Indonesia (73rd), with bureaucratic red tape often delaying investments. 

3. Human capital represents another significant hurdle. While the tariff matches Israel’s 17%, the Philippines lacks Israel’s robust R&D ecosystem to export high-tech goods like medical equipment, leaving it reliant on lower-value sectors such as electronics assembly and agriculture. 

Israel invests 6.3% of its 2023 GDP in R&D, one of the highest rates globally, compared to the Philippines’ meager 0.324%, limiting its ability to compete in advanced industries. 

These constraints mean that even a “favorable” tariff doesn’t automatically translate into economic gains—investors may still look elsewhere if the cost of doing business remains prohibitively high. 

The tariff’s silver lining hinges on the Philippines overcoming these challenges, but deeper vulnerabilities lurk beneath the surface. 

High trade exposure and financial-fiscal constraints threaten to turn this political win into an economic missed opportunity, as the country grapples with the fallout of a global trade war. 

V. Fallout from Tariffs: An Uncertain Future: Tariffs May Deter Investment in the Philippines 

The regime uncertainty introduced by Trump’s tariff policy creates an opaque economic horizon, deterring investments even in a country like the Philippines, which some argue is insulated due to its consumption-driven economy (72.5% of its 2024 real GDP). 

However, this narrative overlooks the fundamental economic principle encapsulated in Say’s Law: "supply enables demand" (Newman 2025) or "production precedes consumption." (Shostak 2022) 

The 17% tariff directly threatens this dynamic by reducing demand for Philippine exports, which totaled $12.14 billion to the U.S. in 2024, accounting for 16.6% of total exports. (Figure 3, lower graph) 

Analysts estimate a direct annual loss of $1.6–1.89 billion, cutting income for workers in export sectors like electronics and agriculture, and thus curbing their spending power. 

Nota Bene: These estimates reflect only the direct impact, ignoring the epiphenomenon from complex feedback loops, such as secondary and the nth effects on supply chains, employment, and consumer confidence, which could amplify the economic toll. 

Government data further disproves the notion of immunity.

Figure 4

The share of goods exports and imports in 2024 GDP was 42% (13.8% exports, 28.1% imports), a significant exposure for a supposedly consumer-driven economy. This means trade disruptions hit hard, affecting both production (exports) and consumption (imports of goods like electronics and food). (Figure 4, topmost image) 

Excluded from this discussion are exports and imports of services. If included, exports and imports in real GDP would account for 64.2% of the 2024 GDP! (Figure 4, middle graph) 

AP Lerner (1936) highlighted the mutual dependence of exports and imports in trade economics. A decline in exports limits foreign exchange earnings, which in turn reduces the ability to finance imports. This creates a ripple effect, showcasing the interconnected nature of international trade. 

Even the service sector, a key income source through business process outsourcing (BPO, contributing 8.5% of 2024 GDP), isn’t safe. 

U.S. firms, facing their own tariff costs (e.g., 46% on Vietnam), might cut back on outsourcing to the Philippines, further denting income. 

The opaque economic horizon—marked by unclear earnings projections and obscured hurdle rates—adds to the reluctance to deploy investments. 

Businesses, unable to accurately forecast returns amidst this uncertainty, are likely to delay or cancel projects, from factory expansions to new market entries, exacerbating the Philippines’ economic challenges. 

VI. Shaky Foundations: Why the Consumer Economy Isn’t Immune 

The consumer economy narrative also ignores the role of debt. 

Household debt has skyrocketed to Php 2.15 trillion in 2024, up 24.26% from 2023, with credit card debt alone rising 29.65% year-on-year. But this borrowing isn’t free—high interest rates strain budgets, which comes on top of the loss of purchasing power from inflation. 

Consumer loans as a percentage of NGDP soared to a record 11.7%, while consumer loans relative to consumer NGDP also reached a historic high of 15.32% in 2024. 

In contrast to other developed economies, the Philippine banking sector’s low penetration levels have concentrated household debt growth within higher-income segments. This phenomenon heightens concentration risk, as financial stability becomes increasingly reliant on a limited, affluent demographic. 

Despite this debt-fueled spending, GDP growth slackened to 5.2% in the second half of 2024, down from 6.1% in the first half, while annual core CPI (excluding food and energy) fell from 6.6% in 2023 to 3% in 2024, signaling weak demand. 

Clearly, “free money” hasn’t spruced up the economy. 

Add to this the uncertainty facing export and import firms, which could lead to job losses, and a looming U.S. migration crackdown that threatens remittances—$38.34 billion in 2024, or 8.3% of 2024 GDP, with 40.6% from the U.S. (Figure 4, lowest pie chart) 

If Filipino workers in the U.S. face deportations, remittances could slash household spending, especially in rural areas. 

This could add to hunger rates—which according to SWS estimates—in Q1 2025 have nearly reached the 2020 pandemic historic highs. 

Far from immune, the Philippines’ consumer economy is on shaky ground, vulnerable to both domestic and global pressures. 

VII. Financial Fragility: Historic Savings-Investment Gap, Record Debt, and Dollar Dependence 

The Philippines’ economic challenges are compounded by a chronic savings-investment gap that severely limits its ability to adapt to the tariff. 

Domestic savings are a mere 9.3% of 2024 GDP, while investments stand at 23.7%, creating a staggering 14% gap that forces reliance on volatile foreign capital, such as remittances ($38 billion) and FDI ($8.9 billion in 2024). 

These inflows, however, are increasingly uncertain amid rising global trade tensions. 

This savings scarcity is primarily driven by fiscal pressures. Government spending has soared to 14.5% of GDP, fueled by post-COVID recovery efforts and infrastructure projects, pushing national debt to Php 16.05 trillion (60.72% of GDP) in 2024.

Figure 5

External debt grew 9.8% to USD 137.63 billion, surpassing the country’s gross international reserves (GIR) of USD 106.3 billion—a figure that includes external public sector borrowings deposited with the Bangko Sentral ng Pilipinas (BSP). (Figure 5, topmost diagram) 

The external debt service burden surged 15.6% year-on-year to a record USD 17.2 billion in 2024, pushing its ratio to GDP to the highest level since 2009.  (Figure 5, middle window) 

To finance this ballooning debt, the government borrows heavily, crowding out private investment. 

Banks, holding Php 5.54 trillion in government securities in 2024 (net claims on the central government), prioritize lending to the government while directing credit to riskier private sectors—consumers, real estate, and elite firms—rather than promoting finance to manufacturing or SMEs, which are crucial for adapting to the tariff through innovation or market diversification. 

Not only through deposits, banks have been net borrowers of public savings via the capital markets. In 2024, the banking system’s bills and bonds payable swelled 30.9%, from Php 1.28 trillion in 2023 to Php 1.671 trillion. 

Meanwhile, non-bank sectors, competing for the same scarce savings, also face high interest rates, creating a significant roadblock to investment. 

High fiscal spending also fuels inflation. The Philippine CPI posted 6% in 2023, above the central bank’s 2–4% target. This acts as an inflation tax, eroding household savings as rising costs (e.g., food prices up 20%) force families to spend rather than save. 

Though the CPI dropped to 3.2% in 2024, the fiscal deficit remains near pandemic highs, exacerbating financial pressures.

With banks, the government, and businesses all vying for limited funds, the Philippines struggles to finance the reforms needed to turn the tariff’s political edge into economic gains, such as the CREATE MORE Act’s incentives to lower energy costs and attract investors.

Moreover, uncertainties from the tariffs put at risk the rising systemic leverage (total bank lending + public debt), which rose 11.13% year-on-year in 2024 to Php 29.960 trillion—accounting for 113% of 2024 NGDP! (Figure 5, lowest graph) 

Worse, potential weakness (or a recession) in GDP could spike the fiscal deficit, necessitating more debt, including external financing, which further strains the demand for foreign exchange. 

The Philippines’ dependence on dollars for its external debt and imports makes it particularly vulnerable to global shifts in dollar availability, a risk amplified by the tariff’s broader implications. 

VIII. Intertemporal Impact or Short-to-Longer Term Impact on the Philippine Economy 

The tariff’s impact on the Philippines unfolds over time, with distinct short-term and long-term effects. 

In the short term (0–2 years), the estimated $1.6–1.89 billion export loss, combined with a potential remittance drop, should add pressure on the peso (already at 57.845 in 2024), translating to higher inflation and squeezing consumers. 

Job losses in export sectors like electronics and agriculture, coupled with credit constraints from the savings gap, limit the government’s ability to cushion the blow. GDP growth, already down to 5.2% in the second half of 2024, could dip further, missing the government’s 6–8% target for 2025. 

Over the longer term (3–10+ years), there’s potential for growth if the Philippines leverages reforms like the CREATE MORE Act, which offers power cost deductions and tax breaks to attract investment. 

However, all these take time, effort, and funding, which—unless there is clarity in the economic horizon—could offset whatever gains might occur.

Figure 6 

Philippine trade balance has struggled even in anticipation of the passage of the CREATE Act. (Figure 6, topmost image)

The BSP’s USDPHP implicit cap or ‘soft peg regime’—which subsidizes the USD—has played a significant role, contributing to surging imports and external debt (previously discussed here). This policy, while stabilizing the peso in the short term, exacerbates the trade deficit and increases reliance on foreign capital, making long-term growth more challenging. 

The savings gap and fiscal pressures make this a steep climb. Without domestic capital, the Philippines remains vulnerable to global capital flow disruptions, which could derail its long-term economic prospects. 

The interplay of these factors underscores the need for a strategic, holistic, and sustained approach to economic reform—one that tackles both immediate challenges and structural weaknesses. 

However, given the tendency of popular politics to prioritize the short term, this vision may seem far-fetched. 

IX. The US Dollar’s ‘Triffin Dilemma’: Global Risks and Philippine Challenges 

These disruptions tie into broader global risks, starting with the Triffin Dilemma. 

The Triffin Dilemma, named after economist Robert Triffin, highlights a fundamental conflict in the U.S.’s role as the issuer of the world’s reserve currency. To supply the world with enough dollars to meet global demand, the U.S. must run current account deficits. 

The Triffin Dilemma arises because running persistent deficits to supply dollars undermines confidence in the dollar’s value over time. If deficits grow too large, foreign holders may doubt the U.S.’s ability to manage its debt (U.S. national debt was $34.4 trillion in 2024, or 121.85% of GDP), potentially leading to a shift away from the dollar as the reserve currency. (Figure 6, middle graph)

Conversely, if the U.S. reduces its deficits (e.g., through tariffs), it restricts the global supply of dollars, which can disrupt trade and financial markets, also eroding the dollar’s dominance. 

The U.S. dollar’s role as the world’s reserve currency (58% of global reserves) relies on constant U.S. trade deficits to supply dollars globally. (Figure 6, lowest chart)

The U.S.’s $1.2 trillion deficit in 2024 does just that, supporting its “exorbitant privilege” to borrow cheaply and fund military power. 

But tariffs, by aiming to shrink this deficit, reduce the dollar supply, risking the dollar’s dominance. If countries shift to alternatives like the Chinese yuan (2.2% of reserves) or euro (20%), the U.S. faces higher borrowing costs, potentially curbing military spending ($842 billion in 2024), while the Philippines struggles to access dollars for its USD 191.994 billion external debt and trade deficit in 2024. This could weaken the peso further, raising costs and inflation. 

Meanwhile, if other nations like China or the EU liberalize trade in response, alternative markets could emerge. 

The Philippines might redirect exports to China (which posted a $992 billion surplus in 2024) or leverage the EU-Philippines FTA, but this risks geopolitical tensions with the U.S., its key ally, especially amid West Philippine Sea disputes. 

An “iron curtain” in trade, investments, and capital flows looms as a worst-case scenario, further isolating the Philippines from the global capital needed to bridge its savings gap. The potential erosion of the U.S.’s military presence in the Indo-Pacific, due to financial constraints, could also embolden China, complicating the Philippines’ strategic position. 

X. Conclusion: Winnowing the Political Chaff from the Economic Wheat

While the 17% U.S. tariff on Philippine goods seems to offer a political edge, the economic reality tells a different story.

The regime uncertainty from Trump’s bold tariff regime exposes internal fragility brought about by high trade exposure, a savings-investment gap, and fiscal-financial constraints.

The consumer economy isn’t immune, as export losses, rising debt, and remittance risks threaten investments and spending power.

Global risks, like the erosion of the U.S.’s dollar privilege through the Triffin Dilemma, could further limit the Philippines’ adaptability.

Over the long term, reforms like the CREATE MORE Act could unlock growth, but only if the Philippine government acts swiftly to boost savings by further liberalizing the economy, reforming exchange rate policies, and supporting these efforts with a material reduction in fiscal spending.

Trump’s tariff is a wake-up call: though the drastically shifting tides of geopolitics translate to the need for flexible policymaking ideally, the sunk cost of the incumbent economic structure operating under existing policies hinders this process.

‘Resistance to change’ that works against vested interest groups—such as entrenched political and business elites who benefit from the status quo—will likely pose a significant obstacle too.

As such, drastic changes in the economic and financial climate raise the risk of a recession or a crisis, particularly given the Philippines’ high systemic leverage and dependence on foreign capital.

The next step may be to throw a prayer that Trump eases his hardline stance, offering a reprieve that could buy the Philippines time to adapt to this new global reality. 

___

References 

Colin Grabow, Scott Lincicome, and Kyle Handley, More About Trump’s Sham “Reciprocal” Tariffs, April 3, 2025 Cato Institute 

Robert Higgs, Regime Uncertainty, 1997 Independent.org 

David R. Breuhan A Brief History of Tariffs and Stock Market Crises November 4, 2024, Mises.org 

Frank Shostak, Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply, July 26, 2022, Mises.org 

Jonathan Newman, Opposing the Keynesian Illusion: Spending Does Not Drive the Economy, January 21, 2025 

A. P. Lerner, The Symmetry between Import and Export Taxes, 1936 Wiley jstor.org