The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

 

The reality is, if we tell the truth, we only have to tell the truth once. If you lie, you have to keep lying forever—Rabbi Wayne Dosick 

In this issue

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

I. GDP Shock, the PSEi 30 Barely Blinks

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along

III. What the PSEi 30 Shows—and What It Conceals

IV. The Five-Minute Market: January 30

V. Index Output vs. Concentrated Reality

VI. ICTSI: The PSEi 30’s Silent Underwriter

VII. Concentration Risk Is Not Easing—It’s Shifting

VIII. Liquidity Concentration Remains Entrenched

IX. Manufactured Gains, Accumulating Fragility

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story

X. Expect a Pullback from the Overbought Mining-Oil Index

XI. When GDP Breaks, the PSEi 30 Follows

XII. Easy Money Fails—Again and Again!

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line

XV. Philippine Peso Stress Is the Signal, Not the Noise

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution

XVII. From Gaming the Index to Gaming the Curve

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions

XIX. The PSEi 30 as Collateral Infrastructure

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome 

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress 

Why Philippine equities rose as GDP, the peso, and credibility deteriorates

I. GDP Shock, the PSEi 30 Barely Blinks 

Figure 1

In a week when Philippine authorities announced yet another growth shock—GDP slowing further from a revised 3.9% in Q3 to just 3.0% in Q4 2025—the domestic headline equity index closed the week down a negligible 0.07%. (Figure 1, upper table) 

For full-year 2025, GDP growth decelerated sharply to 4.4%, from 5.7% in 2024—a material slowdown that we will examine in detail in a separate post. 

Yet markets barely reacted. 

Despite deteriorating macro fundamentals, January’s performance pushed the PSEi 30 up 4.56% month-on-month (MoM) and 7.96% year-on-year (YoY), its strongest combined MoM and YoY showing since September 2024. 

On the surface, the Philippine equity market appeared resilient—almost indifferent—to worsening growth data. 

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along 

This performance placed the PSEi 30 alongside most easy-money-driven Asian equity markets, many of which extended their 2025 bull runs into the first month of 2026. 

According to Bloomberg data, 16 of 19 major Asian indices ended January higher, with an average gain of 4.7%. South Korea’s tech-heavy KOSPI led the surge, climbing nearly 24% in January and touching successive record levels. Other markets—including Singapore, Taiwan, Indonesia, Pakistan, and Sri Lanka—also carved out new highs. (Figure 1, lower graph) 

In this context, Philippine equities benefited from the regional liquidity tide. But the PSEi 30’s gains tell only part of the story. 

III. What the PSEi 30 Shows—and What It Conceals 

Media commentary has largely attributed January’s index strength to optimistic domestic narratives, while blaming external forces and corruption for lingering weaknesses (self-attribution bias). 

What has been almost entirely ignored is how index construction, free-float weighting, and trading mechanics materially shape reported performance. 

The public remains largely uninformed about how a small cluster of heavyweight constituents—rather than broad-based participation—drives index outcomes. 

January 30 offers a textbook example. 

IV. The Five-Minute Market: January 30  

Figure 2

On January 30, the PSEi 30 jumped 1.7% in a single session. But roughly 87% of that gain occurred during the five-minute pre-closing (floating) period, not during continuous trading!  (Figure 2, topmost window) 

Banks—particularly BPI—were central to this move. 

BPI was down 0.27% heading into the pre-closing phase. During the runoff, however, the stock reopened nearly 9.73% higher—effectively a 10% spike!! (Figure 2, middle image) 

This unusually large end-of-session repricing almost single-handedly altered the index outcome. 

Other major beneficiaries:

• BDO (+1.96%)
• Metrobank (+2.82%)
• SM Investments (+0.96%)
• Ayala Land (+1.43%) 

All were among the top 10 stocks by free-float market capitalization. 

In a wink of an eye, January’s "outstanding" index performance was successfully locked in. 

V. Index Output vs. Concentrated Reality 

This divergence becomes clearer when decomposing returns. 

The average month-on-month return of PSEi 30 component stocks was only 2.86%, and 2.85% on a full market-cap basis—well below the index’s 4.56% headline gain. (Figure 2, lowest diagram) 

Why the gap? 

Because the most significant contributions came from free-float-weighted gains concentrated in a handful of names—led principally by ICTSI, and reinforced by BPI, Ayala Corp, Metrobank, and Meralco. As of January 29, these five stocks accounted for 39.7% of the index’s free-float market capitalization. 

VI. ICTSI: The PSEi 30’s Silent Underwriter

Figure 3

The PSE’s largest constituent, ICTSI, has been racing toward successive record highs throughout January. This performance is magnified by its free-float weight of 17.82%, an all-time high as of January 29th. (Figure 3, topmost pane) 

In practical terms, ICTSI has bankrolled the PSEi 30’s returns since 2024. 

With approximately 55% of the Services sector’s full market capitalization, ICTSI has been primarily responsible for the sector’s 8.7% MoM and 33% YoY gains. 

Sectoral strength, in this case, is less a reflection of broad economic vitality than of single-firm dominance amplified by index mechanics. 

VII. Concentration Risk Is Not Easing—It’s Shifting 

Interestingly, despite ICTSI’s outsized role, the combined weight of the top five index constituents appears to have peaked. After reaching a record 53.02% in mid-December, their share eased slightly to 51.64% by January 29th. (Figure 3, middle chart) 

This can be read in two ways: 

One. A welcome broadening of gains beyond the largest names, or

Two. A growing vulnerability stemming from the index’s continued dependence on a narrow elite—increasingly dependent on tactical flows rather than structural diversification. 

At this stage, trading behavior suggests the latter interpretation is more consistent with reality. 

VIII. Liquidity Concentration Remains Entrenched 

January trading data reinforces this conclusion. 

The top 10 brokers accounted for an average of 61.5% of daily main board volume, down marginally from 63.5% in December. (Figure 3, lowest visual) 

On a weekly basis, however, this concentration trend has been rising steadily since the second half of 2025. 

Meanwhile, the top 10 traded issues represented 58.8% of daily volume, down from 65% in December. 

These are modest improvements—but they do not alter the core reality: trading activity remains heavily concentrated among a small group of players and stocks, who, in turn, shape index outcomes. 

IX. Manufactured Gains, Accumulating Fragility 

Taken together, January’s performance was not the product of broad-based confidence or improving fundamentals. It was manufactured through index construction, free-float concentration, and strategically timed flows—particularly during thin post lunch trading, pre-closing and runoff windows. 

While the gains appear orderly on the surface, the risk concentration embedded within the PSEi 30 is reticently intensifying. This fragility is neither well understood nor adequately discussed—yet it defines the true state of the market far more than the headline index level ever could. 

X. Breadth Confirms Concentration, Not Strength 

There is more evidence that January’s headline gains masked a deeply concentrated market.

Figure 4 

Despite the PSEi’s strong January performance, market breadth barely improved. 

The advance–decline spread widened by only 30 issues, a stark contrast to 2023’s spread of 184, when the PSEi posted a more modest 3.45% YoY gain—yet still ended that year down 1.77%. (Figure 4 topmost window) 

In other words, stronger index performance today is being achieved with far weaker participation. 

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story 

A significant contributor to January’s gains came from the Mining and Oil sector, riding the surge in global metal prices. 

The sector’s 10-component index jumped 25.8% MoM and an extraordinary 175% YoY, off a deeply depressed base. Unlike 2006–2012, miners are not just outperforming but decisively diverging from the PSEi 30. (Figure 4, middle image) 

Volume followed performance. Mining turnover surpassed that of the once-favored (PLUS and BLOOM) gaming stocks—higher by 18% in January. Yet, PLUS fell 19.01% MoM, BLOOM rose 12.6%, and Philweb surged 56.3%—a clear signal of institutional preference for high-volatility, high-beta trades. (Figure 4, lowest diagram)

This divergence highlights an uncomfortable reality: capital is rotating not toward fundamentals, but toward popular narratives, leverage and momentum.

The Mining sector’s share of main board volume surged to 7% in January, contributing materially to the 33.6% YoY increase in the PSE’s main board volume and the 36.5% rise in total/gross market turnover. Cross transactions accounted for 17.3% of MBV. 

Meanwhile, the Property sector’s share of gross turnover rose to 21.7% from 18.74%, while Holdings increased to 15.26% from 14.21%. Property had negative returns (-3.43% MoM, -.26 YoY) while holdings were buoyed (+4.86 MoM, +2.25% YoY) 

Together, these shifts reinforce a widening divergence between mainstream index performance and the previously shunned, cyclical, or politically unpopular sectors, particularly mining and oil. 

We have long anticipated the sector’s revival, and recent performance has clearly validated our call. 

But wait… 

X. Expect a Pullback from the Overbought Mining-Oil Index 

Though we expect the mining index to endure a sizeable pullback from their overextended, overbought levels—no trend moves in a straight line—this does not negate the broader regime backdrop supporting the sector. 

A growing set of global structural risks consistent with a potential regime transformation—manifested in a deepening war economy, the weaponization of the dollar, sanctions, protectionism, fiscal dominance, persistent central bank easing, and widening geopolitical tensions—should place a cap on any sustained decline. 

In this context, we should also expect partial rotation within the complex, particularly from metals toward oil-gas, rather than a wholesale reversal of the trade. 

XI. When GDP Breaks, the PSEi 30 Follows 

Despite the apparent regularity of post–lunch recess rallies—what I have previously labeled "afternoon delight"—and the repeated appearance of coordinated large-cap based "pre-closing" pumps (and dumps), the PSEi 30 has historically tracked GDP trends, albeit with a lag.

Figure 5

The most recent upside cycle began in mid-November 2025 and appears to have peaked by mid-January 2026. Notably, the index remained conspicuously indifferent to the Q4 GDP collapse, as if the slowdown had already been discounted—or managed. (Figure 5, topmost window) 

History suggests otherwise. 

At the onset of BSP rate cuts in August 2024, the PSEi surged nearly 15%, as easing was sold as a growth elixir. That optimism proved short-lived. (Figure 5, middle graph) 

GDP slowed sharply from 6.5% in Q2 2024 to 5.2% in Q3, barely stabilized in Q4, and was followed by a 10.5% PSEi plunge in Q1 2025. 

By Q3 2025, GDP had deteriorated further to 3.9%, and the PSEi collapsed another 18%. 

This pattern is not accidental. 

XII. Easy Money Fails—Again and Again! 

It bears repeating: RRR cuts, policy rate easing, expanded deposit insurance, and persistent fiscal stimulus—including pandemic-era deficits—have NOT revived growth. (Figure 5, lowest chart) 

As history has shown, they have accompanied or worsened economic deceleration. 

Yet the mainstream narrative insists these tools are the only solution.

Figure 6

The same logic is now being applied to equities: more liquidity, more intervention, more management of outcomes. (Figure 6, topmost diagram) 

Ironically, rather than igniting a genuine bull market, the PSEi increasingly requires non-market interventions to manufacture the appearance of macro stability. 

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs 

Aside from direct market interventions, the politics of engineering a bull market have evolved.

Beyond the Capital Markets Efficiency Promotion Act (CMEPA)—which we have repeatedly criticized—the mainstream has revived proposals reminiscent of the defunct GSIS–SSS stock loan programs to further stimulate retail participation. 

These initiatives, however, reflect fundamentally pro-cyclical policymaking. 

The GSIS and SSS stock loan programs—most notably the GSIS Stock Purchase Financing Program (SPFP) launched in 1994—coincided with the peak of the PHISIX (now the PSEi). 

The 1997 Asian Financial Crisis inflicted severe losses, exposing the program’s structural flaw: embedding leverage and mark-to-market risk into institutions designed for capital preservation. 

The crisis did not create this fragility; it merely revealed the contradiction. 

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line 

Current discussions on deepening participation now extend to PERA (Personal Equity and Retirement Account), where savings are managed by accredited administrators and invested in qualified instruments such as mutual funds, UITFs, insurance products, and government securities. 

While PERA removes explicit leverage, it introduces principal–agent problems and asymmetric information risks, with outcomes largely driven by professional managers rather than individual contributors—with fee structures, asset allocation, career advancement and herding behavior playing a decisive role in their decision process. 

Losses being absorbed at the individual level is systemically healthy. But the moment the state attempts to cushion or prevent those losses, it recreates the SPFP problem—only more slowly and diffusely. 

In short, policies framed as "enhancing participation" amplify bubble cycles and effect a tacit redistribution from savers to institutional intermediaries, ultimately eroding—rather than strengthening—the foundations of the capital market. 

XV. Philippine Peso Stress Is the Signal, Not the Noise 

The accelerating GDP slowdown validates our long-held view that the USDPHP breach of the 59 “soft peg” was a signal of mounting structural stress. (Figure 6, middle image) 

It also casts the BSP’s gold sales in a different light—not merely as FX defense, but as an indication of latent stress across government, central bank, and bank balance sheets. 

As we wrote last November: 

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide.

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution 

The peso’s recent recovery owes less to domestic strength than to global easing dynamics. US dollar weakness—driven by policy stance and market expectations under President Donald Trump—pushed the DXY down roughly 0.8% MoM and 9.8% YoY. 

As a result, USDPHP ended January at 58.86, temporarily slipping below the 59 threshold (+0.85% YoY, +0.12% MoM). 

This reprieve is unlikely to last. Once balance-sheet stress becomes more visible, a test of the 60-level appears increasingly inevitable.

XVII. From Gaming the Index to Gaming the Curve 

At January’s close, the Philippine BVAL yield curve revealed yet another layer of policy response. (Figure 6, lowest chart)

Figure 7

The curve reflects a deliberate, policy-induced bearish steepening. As Q4 GDP slowed to 3%, the BSP eased the front end and belly to support bank funding conditions and preserve financial stability. Simultaneously, 20–25 year yields rose month-on-month, exceeding November 2025 levels, as markets imposed a fiscal and inflation credibility premium amid global term-premium repricing. (Figure 7 topmost image) 

The contradiction is stark: domestic accommodation is deployed to stabilize balance sheets, while long-duration yields signal rising skepticism over fiscal sustainability and inflation containment. 

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions 

This curve management feeds directly into the gaming of the PSEi 30. 

Historically, widening 10Y–3M and 10Y–6M spreads have coincided with CPI pressure, as accommodation persists and inflation risk migrates through FX and expectations channels. (Figure 7 middle chart) 

Meanwhile, the PSE’s Financial Index has risen across both steepening (2020–22) and flattening (2023) regimes—not because of curve “health,” but because of curve control. (Figure 7, lowest graph) 

Through coordinated yield-curve signaling, peso stabilization, and institutional balance-sheet absorption, authorities project macro stability despite slowing growth—redistributing stress away from markets and toward households, future inflation, and shrinking policy space.

XIX. The PSEi 30 as Collateral Infrastructure 

Beyond boosting expectations and managing optics, the theatrics surrounding the PSEi 30 serve a more practical and underappreciated function: inflating and stabilizing collateral values across the financial system. 

For banks, insurers, trust entities, and large institutions, equity holdings—particularly index-heavy, highly liquid names—are not merely investments. They function as collateral, balance-sheet buffers, and capital-supporting assets used in repo transactions, interbank funding, structured products, and internal risk models. 

In an environment of slowing GDP, rising long-end yields, and latent balance-sheet stress, mark-to-market declines in these assets would immediately tighten financial conditions. Holding the PSEi 30 together—especially its largest constituents—helps preserve collateral valuations precisely when funding pressures are building elsewhere. 

This helps explain why support is selective rather than broad-based. Propping up the largest free-float names delivers the greatest collateral impact per peso deployed, even as market breadth deteriorates. The objective is not market health, but balance-sheet continuity. 

In this light, the PSEi 30 becomes less a reflection of economic confidence and more a policy-adjacent tool—a stabilizing surface that allows banks and institutions to extend accommodation, delay recognition of stress, and avoid procyclical tightening in credit and funding markets. 

But this stability is conditional. Should equity collateral values falter, or when cash flow/liquidity problems intensify, the feedback loop would reverse—forcing deleveraging, tightening credit, and accelerating the very slowdown policymakers are trying to defer.

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome 

Index gains were manufactured through concentration, liquidity choreography, curve control, peso management, and the tacit inflation of collateral values. 

What appears as market resilience is, in reality, the financial system preserving its own scaffolding amid deteriorating growth—a classic symptom of a late-cycle phase rather than a genuine expansion. 

In such phases, markets are stabilized not to signal strength, but to delay adjustment. Stress is redistributed away from asset prices and toward households, future inflation, fiscal credibility, and shrinking policy space. 

The longer stability is engineered rather than earned, the more abrupt the eventual repricing becomes—when collateral support weakens and policy capacity is finally exhausted. 

___

Select References (quote and validations) 

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025

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

 

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

 

In this issue

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

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

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

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

Conclusion: Accommodation as Policy, Crisis as Outcome 

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

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

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

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

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

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

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

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

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

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

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

Figure 1

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

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

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

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

Figure 2

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

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

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

That is not all. 

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

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

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

History may not repeat—but does it rhyme? 

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

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

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

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

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

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

Figure 3

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

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

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

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

Figure 4

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

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

Taken together, these figures point to a clear pattern. 

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

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

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

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

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

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

Why this persistence? 

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

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

Figure 5

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

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

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

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

Figure 6

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

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

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

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

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

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

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

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

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

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

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

Conclusion: Accommodation as Policy, Crisis as Outcome 

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

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

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

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

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

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

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

 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

  

With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. There is less ground than ever for hoping that, so long as the people have no choice but to use the money their government provides, governments will become more trustworthy—Friedrich August von Hayek 

In this issue 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance

II. The USDPHP’s Suppressed Volatility

III. Media Agitprop and Be Careful of What You Wish For

IV. Lindy Effect: USDPHP’s  56-year Uptrend

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence

VI. Inflation: Same Story, Different Mask

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics

VIII. Employment Optics vs Labor Reality

IX. Deficits, Debt, and the Entropic Drift

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

Gold-inflated FX reserves, suppressed USDPHP volatility, and the slow collapse of the BSP’s soft peg—symptoms of a deeper political problem.

Nota Bene: 

For new readers, this post extends our earlier analysis and projections on USDPHP; please see the reference sections for our previous works. 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance 

2026 opened with USDPHP printing its fourth record high, touching 59.355 on January 7, placing the peso at an all-time low. This comes after the pair decisively breached the 59 level in October 2025—a threshold that, in practice, had functioned as a de facto boundary since late 2022, or roughly three years. 

Almost immediately, the Bangko Sentral ng Pilipinas (BSP) went public, stating it would not defend the peso, despite what it described as “tremendous pressure” to do so. 

This posture echoed its statement following the October breakout, where the BSP asserted that it merely “allows” market forces to determine the exchange rate. 

As we noted in a November 2025 post, such phrasing implicitly presupposes central bank supremacy over the market, implying that exchange-rate movements occur only at the BSP’s discretion—an assertion belied by the data.

II. The USDPHP’s Suppressed Volatility 

Figure 1

Absent official confirmation, one is reminded of Bismarck’s dictum: never believe anything in politics until it has been officially denied. Circumstantial evidence points strongly to prior intervention. In the seven instances when USDPHP approached or touched 59 before October 2025, both trading volume and realized volatility consistently compressed—a pattern difficult to reconcile with a freely clearing market. (Figure 1, topmost and middle panes) 

The same pattern has persisted after the breakout. 

While the BSP has ostensibly “allowed” USDPHP to violate its three-year boundary, average daily trading volume has trended downward since mid-2025, and by early January 2026 had fallen back to levels last seen in late 2024. Combined with a persistently narrow intraday trading range, this has produced a marked decline in day-to-day price changes. Put bluntly, suppressed volume has translated into suppressed volatility—a classic signature of administrative smoothing. 

III. Media Agitprop and Be Careful of What You Wish For 

Predictably, much of the self-righteous media attributed the peso’s latest record low to a “strong” US dollar. Yet the DXY remains broadly range-bound near its 2022 levels, despite a modest rebound from its mid-2025 trough. (Figure 1, lowest chart) 

The divergence is telling: USDPHP has been rising steadily since May 2025, even as the broad dollar index failed to make new highs. 

Yes, the dollar strengthened this week, appreciating against seven of ten Asian currencies tracked by Bloomberg, and USDPHP—up roughly 0.7% on the week—was among the largest movers. But context matters. 

Be careful what the establishment wishes for. Such agitprop risks becoming self-fulfilling. 

The US dollar may indeed be attempting a cyclical rebound. Should that occur, it would likely coincide with a tightening of global financial conditions, making dollar funding scarcer and more expensive. 

A stronger DXY would not cause domestic weakness—but it would expose internal fragilities that have been obscured by global easing. 

This pattern is consistent with Minsky’s financial instability hypothesis. Repeated suppression of exchange-rate volatility creates the illusion of stability, encouraging leverage, fiscal expansion, and balance-sheet risk. The eventual adjustment does not arrive as a shock—but as accumulated fragility ventilated through the peso.

Figure 2

As we argued last November, USDPHP spikes rarely occur in a vacuum. Historically, they coincide with periods of economic stress. Using BSP end-of-quarter data: (Figure 2) 

• 1983 debt crisis: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.2% over 6 quarters (Q1 1997–Q3 1998)
• Dot-com bust (1999–2004): +30.6% over 20 quarters (Q2 1999–Q1 2004)
• Global Financial Crisis: +17.0% over 5 quarters (Q4 2007–Q1 2009)
• Pandemic recession: +22.6% over 7 quarters (Q4 2020–Q3 2022) 

The current breakout, now coinciding with weakening growth momentum, fits this historical pattern uncomfortably well. 

IV. Lindy Effect: USDPHP’s  56-year Uptrend 

More importantly, the breach of the 59 level reinforces the USDPHP’s roughly 56-year secular uptrend. This can be viewed through Nassim Taleb’s Lindy Effect: not as a property of the exchange rate itself, but of the political-economic ideological regime that governs it. The longer a depreciation bias survives—across crises, cycles, and administrations—the more robust and persistent it proves to be. 

This trend is therefore measured not merely by age, but by repeated survival—by the durability of the policies, incentives, and fiscal behaviors that continually reproduce it.

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence 

This context is essential when evaluating the BSP’s reported December 2025 Gross International Reserves (GIR) of $110.872 billion. 

Figure 3

All-time-high gold prices played a decisive role in both the monthly and annual GIR outcome. Remarkably, the valuation gain on gold alone accounted for more than 100% of the roughly $4.6 billion year-on-year increase, while declines in foreign exchange investments exerted a drag on the headline figure.(Figure 3)

Figure 4

As a result, gold now represents its highest share of GIR in over a decade. This is especially striking given that the BSP was the largest net seller of gold in 2024, a move justified at the time as opportunistic monetization of high prices—and, more pointedly, on the argument that gold was a “dead asset.” (Figure 4, topmost and bottom graphs) 

Ironically, the BSP has since been incrementally rebuilding its gold position at higher prices than those at which it sold. 

As in 2020, gold once again served as a leading indicator. Then, large-scale gold sales—alongside increased national government’s external borrowing—were used to finance peso defense under a quasi-soft-peg regime. Once the proceeds were exhausted, borrowing constraints tightened, and usable FX reserves were drawn down, markets ultimately forced an adjustment: a weaker peso. (Figure 4, middle image) 

Briefly, BSP gold sales foreshadowed the 2020 USDPHP spike—and a rerun appears to be unfolding. 

Gold, however, is not equivalent to FX. It is less liquid in crisis: politically sensitive to mobilize, slower to swap into dollars, and volatile in mark-to-market terms. Markets understand this distinction—even if headline GIR figures do not.

Viewed counterfactually, had gold prices fallen in 2025, GIR would have declined materially, reserve-adequacy ratios would look materially worse, and narrative control would have been far more difficult. None of the reported strength reflects improved external competitiveness, durable capital inflows, or enhanced peso credibility. 

Gold did not validate policy. It rescued the optics. 

In that sense, the 2025 reserve story reveals something uncomfortable to the mainstream but unmistakable: serendipity saved incompetence. 

VI. Inflation: Same Story, Different Mask 

The government’s inflation narrative should feel familiar by now. 

Last week, sections of the mainstream media began warning—belatedly—about the impact of peso depreciation on electricity prices. This is hardly new. 

The Philippines’ recent inflation history has unfolded in distinct waves, each closely intertwined with the USDPHP.

Figure 5

During 2013–2018, the steady rise in USDPHP coincided with the first wave of inflationary upswing, which began building from 2015. The second wave in USDPHP (2021–2022) overlapped with the second inflation shock spanning 2019–2022, driven by global central bank easing, supply disruptions, energy prices, and domestic pass-through effects. (Figure 5, topmost image) 

What distinguishes the two episodes is not the inflation spike—but the disinflation phase that followed. 

From September 2018 to June 2021, USDPHP declined by roughly 11%, while CPI fell sharply from 6.7% to just 0.8%. As discussed previously, this period coincided with the BSP’s increasing reliance on Other Reserve Assets (ORA)—including derivatives, repos, and short-term FX borrowing—to manage the exchange-rate regime, a shift clearly visible in the GIR composition. 

In the current episode, the adjustment mechanism has been fundamentally different. 

Since first testing the 59 level in 2022, USDPHP has remained range-bound between 55 and 59, with no sustained appreciation. Yet headline CPI retraced materially—not because of currency relief or market forces, but due to a combination of: 

• Demand destruction, now evident in slowing GDP growth
• Administrative price controls, including ₱20 rice programs and mandated MSRPs
• Distortions arising from these interventions, masking underlying pressures
• Composition and measurement effects, aligned with political incentives for easing—particularly amid ongoing bailouts of the energy sector, banks, and real estate 

It was therefore no coincidence that a day before the October 2025 59-level breakout, the administration announced renewed price freezes, citing natural calamities as justification. 

Despite these measures, December CPI rose to 1.8%, well above consensus expectations, lifting quarterly inflation from 1.4% in Q3 to 1.7% in Q4. Disinflation, it appears, has already begun to fray. 

This erosion is further reflected in liquidity conditions. Bailouts in the energy sector coincided with an 8.26% year-on-year expansion in M3 in October, the fastest since September 2023. (Figure 5, middle diagram) 

November data remain unpublished. 

More broadly, the BSP has either delayed, discontinued, or reduced the frequency of several previously standard statistical releases—ranging from Bank’s MSME lending to stock market activities (transactions, index, and market capitalization) and more. Whether this reflects capacity constraints or political narrative sensitivity remains an open question. But opacity rarely improves credibility. 

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics 

While headline CPI surprised to the upside, food inflation for the bottom 30% of households turned positive for the first time since March 2025—a critical inflection point historically associated with rising hunger and self-rated poverty. (Figure 5, lowest visual)

Figure 6

Consistent with this, the SWS Q4 survey showed self-rated poverty rising to 51% of households, with another 12% on the borderline—a combined 63%. (Figure 6, upper chart) 

This deterioration in sentiment persists despite record consumer credit, near-full employment headlines, slowing CPI, pandemic-scale deficit spending, and still-positive GDP growth. 

This is not an anomaly. Improvements in self-rated poverty reversed as early as 2017, spanning two administrations and coinciding with a sustained surge in deficit spending. 

What is rarely discussed is that this reflects the redistributive and extraction effects of crowding out—the attenuation of the private sector in favor of the state and its preferred private sector intermediaries. 

Households have responded predictably by leveraging their balance sheets to sustain consumption amid eroding purchasing power, refinancing debt rather than building resilience through savings. 

This divergence between headline indicators and lived experience is a classic case of James Buchanan’s fiscal illusion. By diffusing costs through inflation, deficits, and administered prices, the state masks the true burden of adjustment—until it reappears in household balance sheets and public sentiment.

VIII. Employment Optics vs Labor Reality 

The government reported improving employment data last November. Less visible is that labor force participation has been declining since late 2022, while employment momentum shows signs of plateauing (via rounding top formation). (Figure 6, lower graph) 

More troubling is the quality of employment. Functional illiteracy remains widespread, MSMEs and informal work dominate job creation, and household income growth remains structurally dependent on OFW remittances. 

This combination explains why sentiment remains depressed—and why slowing GDP risks morphing into a more pernicious mix of rising NPLs, renewed inflation pressures from deficit monetization, or outright stagflation.

IX. Deficits, Debt, and the Entropic Drift 

Despite the rhetoric surrounding corruption and reform, the administration has signed a Php 6.793 trillion 2026 budget, ensuring that the entropic forces dragging on growth remain firmly in place.

Figure 7

Public debt rose to a record Php 17.65 trillion in November, up 9.7% year-on-year, defying the Bureau of the Treasury’s September projection of year-end declines. (Figure 7, middle and topmost images) 

Domestic debt expanded by 10.95%, while foreign debt rose 7%, continuing its gradual upward share since 2021.(Figure 7, lowest diagram) 

As we have repeatedly argued, expanding deficits mechanically imply rising debt and servicing burdens. Whether domestic or foreign, this accumulation heightens balance-sheet and duration risks. 

No amount of propa-news or fiscal newspeak alters that arithmetic. 

Eventually, these imbalances surface—in the exchange rate, inflation, interest rates, asset prices, and real activity. Not abruptly, but gradually, through a boiling-frog dynamic—a process that markets ventilate over time. 

As Mancur Olson warned, mature systems accumulate distributional coalitions that extract rents while resisting adjustment. The result is slower growth, rising inequality, and a political preference for redistribution over reform—precisely the conditions now reflected in peso weakness and declining household sentiment.

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later 

Unsurprisingly, liquidity-driven rallies continue to propel global equity markets, with the effect especially visible in Asia. The Philippine PSEi 30 gained 3.47% week-on-week (WoW), ranking fourth in the region. As evidence of speculative mania, nine of nineteen Asian indices closed at or near all-time highs for the first time, delivering unusually strong market breadth.

Figure 8

Yet the Philippine rally remains highly concentrated, with a handful of brokers and heavily traded issues generating most of the volume. The largest-capitalization stock, ICTSI, surged 12.5% WoW, almost single-handedly driving the PSEi 30, flanked by Jollibee (+12.32%) and AEV (+11.35%). (Figure 8, topmost visual) 

Weekly breadth within the PSEi 30 favored gainers (19 of 30), while the broader PSE recorded its best two-week breadth since January 2023—ironically, the PSEi 30 still closed 2023 down 1.77%. (Figure 8, middle window) 

Although the number of issues traded daily spiked to 2022 highs—often read as a sign of rising retail participation—main-board turnover averaged just Php 6.25 billion per day, a curious outcome amid New Year euphoria. (Figure 8, lowest chart) 

As with prior easing-driven rallies, such liquidity pumps tend to have short half-lives.

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

The November break of USDPHP 59 marked the unraveling of the BSP’s soft peg and exposed underlying economic fragility. December’s record highs made clear that this was not a transient overshoot, but the manifestation of deeper fault lines—fiscal bailouts, and mounting financial stress—expressed as widening bailouts initially at the energy sector 

January 2026 merely confirms the trajectory. What appears as resilience in the BSP’s foreign reserves has largely been valuation-driven. What looks like disinflation is increasingly administrative maneuvers. What passes for growth is the rising use of leverage, mounting deficits, and liquidity injections rather than productivity or competitiveness. 

In this sense, the peso’s decline is not an accident of global conditions. It is the byproduct of a political-economic regime that repeatedly socializes losses, crowds out private adjustment, favors centralization, predisposed to asset bubbles and substitutes newspeak for balance-sheet repair. 

The exchange rate is not the problem. It is the messenger. 

____

References

Friedrich von Hayek, Choice In Currency, A Way To Stop Inflation, The Institute Of Economic Affairs 1976 

Prudent Investor Newsletters, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025 

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025 

Nassim Nicholas Taleb An Expert Called Lindy January 9, 2017