Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment

 

The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract– Ludwig von Mises  

In this issue:

Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment

I. Introduction: The Path, Not the Print

II. The Fiscal Leg: Php 1.054 Trillion of Deficit, Php 756 Billion of Amortization

III. The Debt Leg: Php 19.61 Trillion and the Peso's Hand in It

IV. Stein's Law and the Two Exits

V. The Trade Leg: Record Exports, Record Imports, Record Gap

VI. Borrowed Stability, Again: August BOP, GIR, and the July Remittance Bounce

VII. Interventions Beget Interventions: The Fare, Wage, and Excise Cascade

VIII. The Global Vise: Bond Vigilantes, Whac-a-Mole Reserves, and a Thinning Treasury Market

IX. The Malinvestment Footprint: The Master Builder's Hotels

X. Conclusion: The Bill Has Arrived

---

Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment 

Php 19.61 trillion of debt, Php 1.9 trillion added in eight months, and the free-lunch politics of price suppression, transfers, and debt finally moving through the balance sheet

I. Introduction: The Path, Not the Print 

Eight months into 2026, the same message keeps appearing on different balance sheets. The adjustment did not disappear. It migrated. 

• The National Government's January–August deficit reached Php 1.054 trillion, up 21.3% from a year earlier and above the pandemic-year 2021 mark for the same stretch, which was just underPhp 1 trillion.
• National Government debt reached a recordPhp 19.61 trillion, withPhp 1.899 trillion added since December.
• The merchandise trade deficit reached $41.56 billion, up 26.3%, with exports and imports both at record year-to-date levels. 

Our Stagflation Part 13 identified the twin deficits. This installment shows the accelerating migration into the sovereign balance sheet, the currency, prices, wages, and the bond market. 

A word on how to read these numbers. This series does not treat official statistics as accurate to the decimal, nor does it litigate their underlying meaning. It does not need to. 

Rather, a process shows in direction, persistence, and the pattern across ledgers, not in whether a figure lands within a rounding error of a forecast. August's blowout is not a surprise to be explained. It is one more step along a path. 

That path was described in our August 2025 piece: "June 2025: A Countdown to Fiscal Shock." The driver was never the oil shock, the pandemic, or any single budget line. It has been the FREE LUNCH POLITICS embedded in Philippine democracy: 

These systems don't just elect leaders—they ratify an ethos: that deficit-fueled expansion is not only moral but inevitable. Redistribution becomes ritual. The annual SONA pipelines new spending schemes, boosting short-term political capital—but the structural anchors are threadbare. Compassion without discipline sedates policy. Time preferences spiral, gravitating toward the instant dopamine hit of political dispensation… 

When such convictions are deeply embedded, a disorderly reckoning is inevitable. 

The 2026 data are that ethos on a bigger stage, and running on a faster clock. The pandemic-era rate and reserve-requirement cuts, the doubling of deposit insurance, and the quiet USDPHP cap intensified the savings-investment gap. 

Today’s EO 110's price suppression, balance-sheet transfers, BSP relief measures, three consecutive timid rate hikes, and an exchange-rate regime the BSP declines to name are accelerating it. Each layer was sold as temporary. 

The deferred cost is what the August data are made of. 

II. The Fiscal Leg: Php 1.054 Trillion of Deficit, Php 756 Billion of Amortization 

Figure 1 

August's deficit was ₱161.3 billion, 90.2% above a year earlier. [Figure 1, upper image] 

The Treasury's explanation: Php 58.6 billion went to settle PhilHealth's arrears, and local governments received larger tax shares. 

Take PhilHealth out and August is still Php 102.7 billion, 21% wider than a year ago. That is the same pace as the eight-month total. The "one-off" did not create the trend. It joined it. An arrears payment is spending that was owed earlier: deferred adjustment arriving on schedule. 

In the eight months of 2026, revenue grew 4.3% to Php 3.22 trillion. Spending grew 8% toPhp 4.27 trillion. Spending is outrunning revenue at nearly twice the speed. 

But the deficit is only the first line of the bill. It does not include amortization. The Treasury's debt service report does. [Figure 1, lower table] 

Total debt service is 1.4 times the deficit and equals roughly 45% of everything the government collected. Interest alone takes about 21% of revenue. The Php 756 billion of principal, Php 631 billion of it—domestic and concentrated in February and April—is not paid from revenue. It is rolled: new borrowing retires old borrowing. Add it to the deficit and the year-to-date gross financing need approaches Php 1.8 trillion.

Figure 2 

In fairness to the data, August itself was a light month for debt service: Php 76.1 billion, the lowest of the year, with amortization at only Php 10.5 billion. The August deficit widened on spending, not on debt service. That makes the YTD picture worse, not better. The heavy rollover months have already passed, and the deficit is still 21% wider. 

YTD debt servicing—interest plus amortization—was lower from last year, but third highest on record. [Figure 2, topmost diagram] 

Now the targets. The 2026 deficit program was ₱1.61 trillion when the year began. It is Php 1.658 trillion now. When the debt ratio reached 62% in 2025, the benchmark was moved to 70%. A ceiling that moves up whenever it is touched is a forecast, not a ceiling. 

The eight-month deficit already equals 64% of the program. Staying inside it requires Php 151 billion a month for the last four months, against a year-to-date average of Php 132 billion. 

Last year's final four months came to Php 708 billion, in a year when the flood-control probe was throttling disbursements. Repeat only that, and 2026 closes near Php 1.77 trillion, about Php 103 billion over program. That is arithmetic, not a forecast. 

III. The Debt Leg: Php 19.61 Trillion and the Peso's Hand in It 

Debt rose Php 217.62 billion in August to ₱19.61 trillion, 12.2% above a year ago and 10.7% above December. The milestone is not that debt is high. It is that nearly Php 1.9 trillion of fresh claims on future income piled up in eight months. 

At Php 1.899 trillion, the January–August increase is the largest eight-month increase in the available series, edging above the Php 1.88 trillion increase recorded during the pandemic period. [Figure 2, middle graph] 

Notice what else the numbers say. Debt grew Php 1.899 trillion. The deficit was Php 1.054 trillion. The Php 845 billion difference comes from valuation and from cash the Treasury borrowed ahead of need, in proportions the Treasury's financing report would show. The stock of claims is growing much faster than the deficit that officially explains it. 

The currency is part of that gap. The Treasury valued external debt at 62.209 pesos per dollar in August, against 61.327 in July and 57.042 a year ago. A 1.4% depreciation applied to the roughly Php 6.28 trillion July external-debt stock implies a peso-translation effect of about Php 90 billion. The external stock actually rose Php 87.25 billion, while total NG debt rose Php 217.62 billion. On this simple calculation, the exchange-rate effect alone is equivalent to roughly 41% of August's total increase in NG debt. This treats the external stock as dollar-denominated and holds its foreign-currency amount constant; it is an approximation, not a Treasury decomposition. 

The exposure has hardly been ever static. External debt accounted for 32.47% of outstanding NG debt in August, and its share has been rising from its March 2021 low. [Figure 2, lowest chart] 

As fiscal pressure raises financing requirements, the peso comes under pressure; depreciation then raises the peso value of foreign-currency debt, feeding back into the fiscal burden. 

A weaker peso does double duty: it raises the peso price of imports and the peso value of foreign-currency liabilities. Our Stagflation Part 16's peso discussion feeds directly into this one. The FX problem and the fiscal problem are one problem. 

Two ideas from Carmen Reinhart and Kenneth Rogoff's study of eight centuries of sovereign debt help explain why the ratio alone is not the number to watch. 

The first is debt intolerance. A government's ability to carry debt depends not only on the current debt-to-GDP ratio but also on its repayment history, inflation history, institutional credibility, and access to financing. Countries with histories of default or monetary instability can encounter financing constraints at debt levels that would be manageable for countries with stronger records. Creditors price the stock of debt, but they also price the history behind it. 

The Philippines has a 1983 debt crisis in that history. A debt-to-GDP ratio approaching two-thirds, with a benchmark moved upward once the ratio touched it, is therefore not just an exercise in comparing one ratio with another country's. It is a question of how much confidence the sovereign can command as the stock keeps rising. 

The second is financial repression. A government that will not sufficiently reduce its deficit can lower its effective financing burden by keeping real interest rates low and creating institutional demand for government paper. The cost does not disappear. It is transferred, often quietly, to savers and financial institutions. 

The pieces are in view. Banks' net claims on the central government were ₱6.24 trillion, about a fifth of their assets, in June. 

Last August, the policy rate was 5.0% against 6.1% inflation, a negative real rate of 1.1 percentage points. 

Against the regulatory and institutional machinery documented throughout this series—portfolio constraints, directed liquidity, reserve and capital rules, and the policy measures that have progressively enlarged the banking system's exposure to the sovereign—this is not merely a low-rate environment. It is financial repression: the cost of financing the state is being shifted onto savers and financial institutions while the sovereign balance sheet continues to expand. 

IV. Stein's Law and the Two Exits 

Herbert Stein's law says that if something cannot go on forever, it will stop. It says that unsustainable dynamics will not last—but says nothing about the timing or the manner. In this case, the political economy decides both. 

Essentially, a deficit that grows faster than the revenue available to service it cannot continue indefinitely. It can stop in two ways. 

• The voluntary exit is a political system choosing to spend less or tax more.
• The involuntary exit is creditors declining to roll the debt at the old price. 

That is the sudden stop: a confidence crisis in which creditors cease to believe that the existing financing path can continue on the old terms. Refinancing suddenly becomes scarce or prohibitively expensive. The adjustment then arrives through some combination of higher yields, capital outflows, currency depreciation, reserve losses, and forced fiscal contraction. The market does not need to refuse every peso. It only needs enough creditors to withdraw or demand a materially higher price for the financing chain to break. 

Our 2025 fiscal shock argument was that the voluntary exit is politically closed, because the system rewards the opposite: voters are offered benefits and billed later. This year's SONA offered more of the same: a higher income-tax threshold, implying about ₱66 billion in forgone revenue, and the removal of system-loss charges. Every proposal moves cost into the future. A political system built that way does not stop itself. 

That leaves the second exit, and the second exit has a door: the Php 756 billion of amortization, and counting. Every maturity has to be refinanced, repaid from available cash, or otherwise absorbed by the balance sheet. So far, the creditors have rolled, with BSP relief measures, held-to-maturity accounting, and banks' captive appetite making the rolling easier. That is why the fiscal story and the bond-market story in Section VIII are one story. 

Stein's Law does not tell us the date. It tells us the constraint: a debt crisis is what happens when an unsustainable political process finally meets an arithmetic constraint it cannot repeal. 

V. The Trade Leg: Record Exports, Record Imports, Record Gap 

The August export headline was spectacular. Exports hit an all-time monthly high of $9.11 billion, up 27.8%. The trade deficit narrowed to $3.85 billion, the smallest in 15 months. 

Figure 3 

Read the same release for what it also says. Over eight months, exports are up 14.8% to $64.04 billion. Imports are up 19.1% to $105.6 billion. The deficit is $41.56 billion. [Figure 3, topmost image] 

The DBCC's full-year assumption was exports +3% and imports +5%, so the planning numbers were off by a factor of roughly four in both directions. 

Exports are production and services sold abroad. The trade deficit is the excess of imports over exports, and it must be financed by other foreign-exchange income or foreign capital. That is why the celebratory export headline is only half the story. The other half is the financing requirement. 

The composition matters too. Electronics comprised 68.1% of August's exports, semiconductors alone 57.6%.  Chip exports surged 73.5%. [Figure 3, middle window] 

The surge is occurring alongside a broader data-center investment boom. In the United States, spending on data-center construction rose 7.5% in August from July and 73% year over year, reaching a seasonally adjusted annual rate of $85 billion, according to Wolf Street—an indication of the infrastructure buildout underpinning the current semiconductor cycle. [Figure 3, lowest diagram] 

A trade balance that improves because one export category keeps gaining share is not, by itself, evidence of broad-based adjustment. It increases the economy's exposure to the investment cycle driving that category—in this case, the global semiconductor and AI buildout.

If that investment cycle weakens—perhaps partly because of rising global rates, and partly because of potential excess capacity—the export engine weakens with it. 

The global capital-spending cycle becomes part of the Philippine balance sheet. 

The fiscal gap and the trade gap are one fact told in two currencies. The government spends more than it collects. The economy absorbs more tradable goods than it sells abroad. The difference has to be financed. 

Someone had to lend. Debt can finance spending. Foreign capital can finance imports. Remittances can finance consumption. Credit can postpone adjustment. None of them creates the productive capital that makes the structure self-sustaining. 

Carl Menger's point was that production rests on complementary goods and resources arranged through time. Machines, materials, skills, and savings must exist before the output does. A financial claim is not one of those goods. 

You cannot borrow your way around scarcity. 

VI. Borrowed Stability, Again: August BOP, GIR, and the July Remittance Bounce 

The Philippines still has genuine buffers. But cushions are not cures. Part 13 showed that June's BOP surplus ($3.4 billion) and the GIR's bounce to $104.74 billion were borrowed: a $2.5 billion eurobond and a $1 billion World Bank package. Borrowed stability has a half-life. 

August's BOP was a $596 million deficit, against a $359 million surplus a year earlier. The eight-month deficit is $5.94 billion, up 10.11%. The GIR is $104.8 billion, almost exactly where June's borrowed reading left it, 5.4% below end-2025 and 7.5% below February's $113.3 billion peak. 

How do reserves rise in a month when the BOP is negative? 

The BOP counts transactions. The GIR also counts revaluation. The BSP attributes the $1.5 billion rise to gold revaluation and income on foreign investments, partly offset by national government drawdowns of FX deposits for debt service. Gold holdings rose $1.62 billion, more than the entire gain. 

Figure 4 

Foreign-currency securities fell $3.11 billion. Other reserve assets (ORA), the repo-and-derivatives bucket, rose $3.352 billion to $15.48 billion, or 14.8% of August GIR. The BSP does not say what moved that bucket. [Figure 4, upper graph] 

The pattern (securities down, other reserve assets up, peso at records on suppressed volatility) is what intervention through derivative and repo positions would look like. 

Despite the BSP's public characterization of its intervention as selective and aimed at smoothing volatility rather than defending a particular level, the reserve changes—and the intervention evidence traced in Part 16—point to a much larger role for intervention than the official description suggests. The issue is not whether the BSP intervenes. It does. The issue is the extent of interventions. 

Meanwhile, July cash remittances rose 1.9% to $3.24 billion, up 6.6% from June, with school-opening seasonality doing part of the lifting. In dollars, the currency that pays for the import bill, growth is about 2%. In pesos it is roughly 10%, because the peso lost about 9% over the year. However, despite the monthly growth, cumulative remittance growth continues to slow—since peaking in 2014. [Figure 4, lower chart] 

The same depreciation that gives remittance households more pesos per dollar also raises the peso value of the government's dollar liabilities. In Section III, that translation effect was roughly Php 90 billion on the external debt stock. One peso, two ledgers. 

The crux of the matter is whether the economy generates foreign exchange fast enough to support its growing claims on it. The trade gap says those claims are growing faster. 

VII. Interventions Beget Interventions: The Fare, Wage, and Excise Cascade 

Look at the calendar. 

• Sept 25: EO 125 suspends the excise on LPG and kerosene, the second suspension this year:Php 3.36 per kilo of LPG (aboutPhp 37 per 11-kilo tank) and Php 5.60 per liter of kerosene, for three months or until the monthly Dubai average falls below $80.
• Sept 26: Wage Order NCR-28 takes effect: Php 60 on a Php 695 floor (+8.6%).
• Sept 28: the fare hike takes effect after six months of administered delay.
• Oct 14: Central Visayas follows with Php 42, 7.8% to 8.4%. 

Four interventions in 19 days. And these are just the significant ones. 

That is the sequence a price control produces. EO 110 suppressed fares. Operators responded by cutting trips as costs outran revenues. Eventually fares had to rise. The fare hike is a partial repeal: the market getting its price back. 

Let there be no mistake: this is a revelation that price controls eventually fail. 

They can suppress a price, but they cannot suppress the scarcity, cost, or resource constraint that produced it. The adjustment therefore migrates elsewhere—into supply, quality, queues, producer margins, fiscal transfers, or eventually the price itself. 

And yet, almost simultaneously, the next offsetting interventions landed. 

Ludwig von Mises called this the interventionist spiral: each intervention fails on its own terms, and the failure becomes the case for the next one. Suppress one price, and distortion accumulates. Another price adjusts. Policymakers intervene again. But as the maladjustments spread, the intervention dragnet widens. Each intervention pushes another cost onto consumers, producers, taxpayers, or the government's balance sheet—a vicious feedback loop. 

This is what I call Whac-a-mole economics: suppress one manifestation of the imbalance and it reappears somewhere else. 

The recurring architecture of emergency economics is:

    price suppression → fiscal transfer → balance-sheet transfer → debt 

And this is where the deeply ingrained POLITICS of the FREE LUNCH enters. Price controls make the benefit visible now and the cost invisible until later.  The voter sees the cheaper fare, the cheaper LPG tank, or relief from a price increase. The deferred cost lands elsewhere—on the producer’s margin, the taxpayer, the fiscal balance, the banking system, or the next year’s budget. The political reward is immediate. The adjustment bill is somebody else’s future problem. 

Notice how the NCR order was built. The Php 85 raise under NCR-27 was frozen by a Pasig court injunction. The wage board did not wait for the court. It issued NCR-28, carrying the same Php 60, outside the injunction’s reach. Two orders, one raise. When the court said no, the board reissued the yes. 

The seen: Php 37 off an LPG tank, Php 60 more wage a day, a fare that was overdue. 

The unseen is where each cost lands. 

The excise holiday takes revenue from a deficit already 21% wider. The IMF mission chief's own defense of it is that higher VAT receipts on pricier gasoline have offset the loss. That is a rebate on the Treasury's own windfall: the price spike taxed at 12% and a slice returned through LPG. The underlying scarcity remains. The cost simply moves from the pump to the fiscal balance. 

The wage orders land on the part of the economy with the least access to capital. A mandated raise of 8% or more is a cost increase, not a gain in output. It falls hardest on the small enterprises that employ most workers and receive 4.48% of bank credit (Part 15). Employers absorb it first in margins, and where there are no margins, in hiring, hours, and informality. Labor data lag those decisions, which is why July's jump in unemployment (Part 16) is more likely the first reading of this series than the last. 

A wage floor above what output supports is a regulatory tax on capital, and it widens the savings-investment gap from a second direction. 

Every one of these measures was designed to ease a price. None produced a single additional unit of fuel, a single additional bus trip, or a single additional peso of savings. 

The intervention changes who absorbs the scarcity. It does not remove the scarcity. 

VIII. The Global Vise: Bond Vigilantes, Whac-a-Mole Reserves, and a Thinning Treasury Market 

The external environment is becoming less accommodating just as the domestic economy becomes more dependent on financing.

Figure 5 

On October 1, the US 10-year Treasury yield touched 5.34%, its highest since 2002, before closing at 5.24%. It rose almost 90 basis points in the third quarter, the biggest quarterly increase of this century. The UK 30-year touched 6% for the first time since 1998. US gross debt crossed $40 trillion on August 18. When the world's collateral reprices, every sovereign that borrows against it faces a different price of money. [Figure 5, upper window] 

Philippine yields have repriced too. The 10-year BVAL reference rate stood at 7.6182% on September 30, up roughly 154 basis points year to date, although still below its May 20 peak of 7.8094%. That May peak was already above the 7.72% reached on November 10, 2022, during the Russia-Ukraine oil shock. The September close therefore remains around the territory reached during that earlier episode of external stress. 

It would be too simple to call this a mechanical spillover from US rates. Philippine bonds are mostly sensitive to domestic conditions, policy actions and the peso's exchange rate.  The streak of USD/PHP highs has come alongside—and amplified—the pressure on Philippine yields. [Figure 5, lower visual] 

A rising yield says financing is becoming more expensive. 

Figure 6 

Look at what stands beneath it. BVAL is a valuation model that produces reference rates from available quotes and trades, and it is only as good as the trades beneath it. The PDS data show the market thinning as yields rise. September's market volume was Php 613.8 billion, the lowest month of 2026: 37% below August, 63% below January, and 26% below the average month of 2024. On September 25 alone, government-securities turnover fell to Php 13.54 billion from Php 24.19 billion a week earlier. Daily turnover has slumped to 2024 levels. [Figure 6, topmost window] 

On that score, yields are rising while volume is falling. The reference price is being formed in a market that is becoming thinner precisely as the government needs that market to absorb more financing. 

And this is the market that is supposed to absorb the incremental demand associated with JP Morgan index inclusion. 

Inclusion may attract investors. It cannot manufacture liquidity. Markets price risk, not press releases. 

Then there is the outside world's own relief habit. The US Strategic Petroleum Reserve fell to 283.8 million barrels in the week ending September 25, the lowest since October 1982, after a 172-million-barrel release. [Figure 6, middle chart] 

US diesel set a record of $6.53 a gallon on September 22. Crude tanker rates recently hit all-time highs. The Middle East conflict and the Russia-Ukraine war continue to disrupt supply. The BSP raised its 2027 inflation assumption on El Niño risk. Agricultural commodity prices, as noted in Part 16, remain elevated. 

This is Whac-a-mole economics at the global level: suppress one price, draw down a reserve, subsidize another input, borrow against the future. The shock reappears somewhere else. 

The US draws down its strategic reserve to hold today's price down. The Philippines draws on its balance sheet to do the same. Both buy a quieter price now and leave a smaller buffer for the adjustment ahead—even as the war has not ended. 

Nor is oil the only pressure. The record Bloomberg agricultural index discussed in Part 16, together with the potential effects of El Niño, adds another layer of supply risk. 

IX. The Malinvestment Footprint: The Master Builder's Hotels 

The twin deficits are not only financing problems. They leave a footprint in the allocation of real capital. 

Cheap credit, policy incentives, and optimistic demand assumptions push capital toward projects whose economics depend on conditions that may not persist. The Philippine hotel sector is one example. 

The great Ludwig von Mises told the story of a master builder who miscounts his materials: the foundation is too large for the bricks available, and the house cannot be finished. The builder may execute perfectly. The error lies in the signal he built on: the apparent availability of resources that do not, in fact, exist in sufficient quantity. 

That is the mechanism of malinvestment. When financing conditions understate the scarcity of savings and capital, investment can be pulled forward into projects that appear viable at the distorted price of credit but cannot all be completed or profitably sustained once the underlying constraint reasserts itself. 

The Philippine hotel pipeline shows the footprint. Of the 20,509 room keys projected for 2026 delivery, 29% have been canceled and fewer than 6,000 delivered on schedule. Yet the 2026–2032 pipeline has grown to 45,884 keys across 213 projects, with Php 387 billion committed. 

The foundation keeps getting larger. 

Demand tells the other half. Foreign arrivals are up only 0.99% year to date through August, while Bohol's first-half arrivals fell 22%. [Figure 6, lowest chart] 

The divergence matters: capital commitments are expanding far faster than the demand evidence that is supposed to justify them. 

Canceled projects are not merely missing hotel rooms. They are evidence that resources were committed on assumptions that did not survive contact with reality. The capital cannot necessarily be redeployed without loss, delay, or impairment. 

The mistake is rarely visible during the boom. It becomes visible when the financing conditions and demand assumptions that supported the investment change. 

That is the malinvestment footprint of deferred adjustment: the distortion does not remain in the financial system. It eventually appears in the physical structure of the economy. 

X. Conclusion: The Bill Has Arrived 

The Philippine economy is now carrying a

• Php 1.054 trillion fiscal deficit,
• Php 756 billion of principal to refinance or repay,
• $41.56 billion trade deficit, and
• Php 19.61 trillion of national debt that grew Php 1.9 trillion in eight months 

It faces higher global financing costs, an energy shock, currency pressure, and renewed commodity inflation.

The policy response remains the same: suppress the price, subsidize the difference, transfer the balance-sheet damage, borrow, repeat. The process runs: 

deficits → debt → debt service → reduced fiscal space → more intervention → more distortion. 

It does not run in isolation. It interacts with the trade deficit, the peso, imported inflation, interest rates, and private balance sheets. The adjustment moves from one ledger to another. 

The numbers say how little room is left. 

The Php 19 trillion-plus debt level that the DBCC had projected for 2026 has already been breached: national government debt reached Php 19.61 trillion in August. The projection did not survive to year-end; the debt stock crossed it with four months still remaining. 

The deficit program has four months to absorb a final-quarter spending pattern that has run above Php 700 billion. 

Foreign reserves are rising through gold revaluation and leveraged based other reserve assets (ORA) rather than an improvement in the underlying external balance. 

The market that must absorb the issuance trades at a fraction of January's volume. 

Economics eventually sends the bill. 

It appears first in prices. Then wages. Then the currency. Then government debt. Then bond yields. And eventually in investment and growth. 

Every debt cycle has its alibi: this time is different. 

This time it was the oil shock. It wasn't. 

The oil shock was the alibi. The underlying cause was the embedded political structure that made deficit-fueled expansion appear both moral and inevitable. Each intervention postponed the adjustment and made the next intervention necessary. Each postponement moved the cost into another ledger. 

Stein's Law does not negotiate with it. 

The adjustment did not disappear. 

It migrated. 

It migrated from prices to wages, from wages to fares, from fares to fiscal transfers, from fiscal transfers to debt, from debt to the currency and bond market, and from the financial system into the allocation of real capital. 

It is now visible in the sovereign balance sheet itself. 

The bill for deferred adjustment has arrived. 

Batten down the hatches. 

_____

References: 

Last four Stagflation series:

Stagflation Part 16: The Peso's 24th Record Low — When the Pressure Valve Widens, September 13, 2026

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation, August 30, 2026

Stagflation Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment August 2, 2026

 

Phisix: BSP’s Tetangco Catches Taper Talk Fever

The BSP’s Version of Taper Talk

JUST a little over two weeks back, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said that the low inflation environment, “gives us room to maintain interest rates and our current policy stance”[1].

In short, the easy money environment will prevail.

This week in an interview on Bloomberg TV, the gentle BSP governor signaled a forthcoming change in the BSP’s policy stance noting that since the Philippine economy is “strong”, “we don’t see any real need for stimulus at this point”[2].

Oh boy, the BSP chief echoes on the ongoing predicament of US Federal Reserve of testing the “tapering” waters.

The BSP was cited by the same Bloomberg article as raising its price inflation forecasts by putting the burden of inflation risks on the weakening peso.

So the BSP essentially has begun to signal a backpedalling from easy money stance.

As I’ve noted in the past, similar to the Fed’s “taper talk”, the BSP’s subtle change in communication stance represents “tactical communications signaling maneuver to maintain or preserve the central bank’s “credibility” by realigning policy stance with actions in the bond markets.”[3]

While the BSP’s preferred culprit has been the weakening peso, the reality has been that higher yields in the global bond markets including emerging Asia and the Philippines has forced upon this discreet volte-face.

The attempt to substitute the influence of bond yields on domestic monetary policies with the weakening peso, the latter having been premised on alleged expectations of higher price inflation represents, as the stereotyped political maneuver of shifting of the blame on extraneous forces—the self-attribution bias.

The peso as culprit for general price inflation has been premised on the fallacious doctrine of balance of payments. The weak peso, according to the popular view, will prompt for an increase in price inflation via higher import prices. But in reality, rising import prices will lead to reduced demand for imports or on consumption of other goods, thereby offsetting any increase in general prices.

This means that the depreciation of the Peso represents a symptom rather than a cause where the principal cause has been due to domestic inflationary policies.

As the great Austrian economist Ludwig von Mises explained[4]

Prices rise not only because imports have become more expensive in terms of domestic money; they rise because the quantity of money was increased and because the citizens display a greater demand for domestic goods.

Since 2001, the asset segment of the BSP’s balance sheet have ballooned by a Compounded Annual Growth Rate (CAGR) of 11% where International Reserves comprises 86% of the asset pie as of December 2012 based on the BSP’s dataset[5].

On the other hand, the gist of BSP’s liabilities or 73% has been on deposits. Special Deposit Accounts (SDA) constitutes 57% of total deposits with Reserve deposits from other deposit accounts signifying a 19% share and deposits from the Philippine treasury at 9%.

Meanwhile, currency issued, which had a 17.7% share of BSP’s liabilities, grew by 9.05% CAGR over the same period.

The rate of growth in the BSP’s balance sheet increased in 2006, but has been in acceleration in 2009 through today.

This also implies that the bulk of the credit expansion in the banking sector have ended up as deposits in the BSP.

The CAGR of BSP’s balance sheet at 11% has nearly been double the 5.97% CAGR of Philippine GDP at constant prices[6] over the same period.

Thus inflation pressures hardly emanates from imports but from the rising quantity of money and assets with moneyness functionality or money-substitutes[7].

Of course, when the BSP governor referred to a “strong” economy as basis for the subtle change in his policy signaling of a reduced need for stimulus, he has actually been resorting to the anchoring bias (behavioral finance) and to the time inconsistent dilemma. That’s because “strong” conditions had all been predicated on the easy money environment.

And with the projection of higher interest rates in a system whose leverage has been rapidly building up over the recent years, as shown by the double digit growth of overall banking debt (left) and the surging rate of loans on what I suspect as the epicenter of the Philippine bubble (right), this means higher cost of servicing debt and higher cost of capital. This also means interest rate and credit risk will mount.

And for the financial world who are dependent on computing for Discounted Cash Flows[8] (DCF) analysis based mostly from Net Present Value[9] (NPV), changes in discount rates will impact heavily on the feasibility of projects and investments. New projects or investments built upon discount rates at current levels will likely be exposed to losses from miscalculations or errors brought about by the expectations of the perpetuity of the low interest rate regime when the BSP officially begins its tightening.

All these means that if the path of interest rates is headed higher, as the BSP chief implies, then conditions will materially change and such will likewise be reflected on risks premiums.

As I previously wrote[10], (bold original)

“Fundamentals” tend to flow along with the market, which is evidence of the reflexive actions of price signals and people’s actions. Boom today can easily be a recession tomorrow.

The Unwarranted Fixation on Credit Rating Upgrades

The continuing optimism by the BSP has been based on the fundamental assumption that changes in interest rates are likely to be gradual and stable.

This seems uncertain as the recent actions in the bond markets have been anything but gradual and stable.

Of course the BSP’s view has been consonant with the Philippine President’s Benigno Aquino III. Such concerted efforts are likely representative of a PR campaign to generate high approval ratings.

In his State of the Nation Address (SONA), the Philippine president blustered over the same 7.8% statistical GDP and of the recent “improvements” on trade competitiveness as key accomplishments of his administration. He also mentioned that current conditions should merit another credit rating upgrade.

Mr. Aquino declared[11] “For the first time in history, the Philippines was upgraded to investment-grade status by two out of the three most respected credit ratings agencies in the world, and we are confident that the third may follow”

Well the public just loves the visible which politicians gladly feed them with.

Yet people hardly realize that credit rating upgrades can even signify as the proverbial “kiss of death”.

A historical overview of some sovereign ratings changes from Fitch Ratings[12] serves as great examples. The above table reveals to us that credit rating agencies hardly sees risks even when these have been staring at them on their faces.

From 1995-2008, Greece (upper pane) had a series of upgrades and positive watches (blue box) in both the long and short term of foreign and local currency ratings. The Fitch began a string of downgrades on Greece only when the country’s debt crisis imploded in 2009[13]. Today Greece has been rated junk “substantial credit risk[14]”, four years after the unresolved crisis.

The successions of credit upgrades basically helped motivate the Greek government to indulge in a borrowing spree which eventually unraveled.

Venezuela has a different story (lower pane). But again we the same credit rating upgrades on the socialist country in 2005, who today suffers from a hyperinflationary episode or a real time destruction of the country’s currency the bolivar[15].

The Fitch eventually regretted their decision, they downgraded Venezuela. Ironically hyperinflating Venezuela has a higher rating than deflating Greece where both defaults on their debts but coursed through different means.

The above examples reveal of how credit rating agencies align their assessment with unfolding market conditions. Rating agencies hardly anticipate them accurately.

So a manipulated asset boom may easily draw credit rating agencies to upgrade sovereign debt.

It is important to draw some very vital lessons from history where banking crises, sovereign debt defaults, currency crises, and serial debt defaults, as chronicled by Harvard’s Carmen Reinhart and Kenneth Rogoff, which spanned “more than 70 cases of overt default (compared to 250 defaults on external debt) since 1800”[16] the common denominator has been overconfidence and denigration of history[17] (will not happen to us) [bold mine]

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.

I would add my conspiracy theory. Credit rating upgrades have been tied with the US bases. The American government has been endeared with the incumbent administration because the President pursues the path of his mother, the former President the late Cory Aquino, who fought to retain US military bases here[18]. 

Today, using territorial disputes as an excuse or a bogeyman, the Aquino government has allowed and defended the so-called non-permanent access of “allies” on former US bases[19].

The Illusions of the Benefits from Government Spending

Another mainstream obsession today has been the devotion towards statistical economic figures which has been presumed as an accurate measurement of economic growth.

As explained last week[20], the statistical 7.8% growth has been mainly rooted on growth by the construction, real estate and financial sectors, as well as, government spending.

And much of the ballyhooed statistical growth in the private sector has been financed by an unsustainable credit bubble.

Yet the public has been mesmerized by the $17 billion of proposed investments by the incumbent government. 

If the government spending is the elixir, then why stop at $17 billion? Why not make it $1 trillion or even $ 10 trillion?

And if such assumption is true, then why has the communist models like China’s Mao and the USSR evaporated? 

Why has China’s recent economic growth been substantially slowing amidst a splurge of government spending in 2008-2009? The newly installed Chinese has announced another $85 billion of railway stimulus to allegedly stem the growth slowdown[21].

With enormous money thrown as fiscal stimulus from the late 90s to the new millennium, why has Japan’s lost decade been extended to two decades+ three years?

Apparently this seemingly perpetual economic stagnation has prompted the new administration to launch the boldest monetary modern day experiment by a central bank which will be complimented by even more fiscal spending stimulus and on the minor side trade liberalization.

Yet growing internal dissension[22] on the risks of Abenomics even from within the ranks of the Bank of Japan has been hounding on the popular expectations of the success of such derring-do political program aside from the risks of a fallout from an economic hard landing in China.

No matter the glorification of mainstream media’s on the alleged success of such policies, Japan’s financial markets are saying otherwise. Has the denial rally in Japan’s major equity benchmark Nikkei fizzled? Japan futures suggest that Monday’s opening will likely break below the 14,000 threshold.

Obviously what government spends will have to be financed by debt, taxes or inflation. Or simply said, whatever government spends has to be taken from someone else’s savings and or productive output. Government spending represents thus a disequilibrating force, because the recourse to institutional compulsion to attain political objectives means a shift of resources from higher value (market determined) uses to lower value (politically determined) uses.

Importantly, since most of government services are institutionalized or mandated monopolies, the absence of market prices means that there hardly have been accurate measures to calculate on the cost-benefit utility of the services provided. And since there are no market price utilized, returns are non-existent. Government spending, hence, represents consumption and not investments.

So the contribution of government spending has mostly been negative rather than positive to real economic growth.

But this is a different story from the mainstream’s statistical aggregate demand management based point of view.

And relative to the statistical 7.8% growth, this only means two things, one—economic boom has largely been concentrated on a few sectors which has been benefiting from the zero bound rates induced credit fueled manic speculation on the asset markets, and two—beneficiaries from government spending have always been the political class, their politically connected affiliates and welfare beneficiaries

And regardless of the egging of the Philippine president, in the latest State of the Nation’s Address (SONA), on the Congress to revamp Presidential Decrees 1113 and 1894 which according to news has been a Marcos era legacy that favors “businessmen close to the dictatorial administration”[23], the politicization of economic opportunities, where the government “picks on the winner” means that cronyism and regulatory capture have been the natural consequences or outcome from such anti-competitive politically distributed economic arrangements.

Thus actions meant to purportedly sanitize projected “immorality” are good as photo opportunities or for Public Relations purposes.

The reactionary rant against officials[24] and personnel of the Bureau of Customs, Bureau of Immigration and Deportation and the National Irrigation Administration (NIA) whom the President severely criticized for an unabated smuggling in the SONA should be a great example. That’s because one of the tarnishes of the incumbent approval rating obsessed regime has been in smuggling, where critics have labeled the Philippines as “Asia’s smuggling capital”[25].

In the world of politics, moral order has mostly been a function of either populism or legalities.

Yet what is popular or legal have not always or frequently been moral. Venezuela’s late Hugo Chavez died a popular leader due to massive wealth redistribution even if he ran the Venezuelan economy aground. Adolf Hitler was also a popular leader until he was defeated in World War II.

In the eyes of populist politics, immorality has hardly been thought about as legal or institutional blemishes. It has always focused on personal virtues: the personality cult mentality.

As the 30^th President of the US Calvin Coolidge aptly warned[26]:

It is difficult for men in high office to avoid the malady of self-delusion. They are always surrounded by worshipers. They are constantly and for the most part sincerely assured of their greatness. They live in an artificial atmosphere of adulation and exaltation which sooner or later impairs their judgment. They are in grave danger of becoming careless and arrogant.

So when politicians or political leaders impose some edict or restrictions, they mostly expect people to behave like sheep. Such arrogant leaders forget that social policies affect people’s real lives, not limited to commerce. 

And in response to such laws, thinking and acting man intuitively find ways to sustain their preferred way of living, and in many times, acting in defiance of arbitrary legislations or regulations or the “rule of men”.

So, for instance, when the Philippine government via the BSP raised sales taxes significantly on gold sales, over 90% of gold output has been smuggled out in reaction[27]: the law of unintended consequences.

The same political agenda goes for India, where gold has a deep cultural attachment. The profligate Indian government wants to ‘balance’ fiscal conditions by reining on gold sales. First they apply import tariffs then restrictions spread to banks, bullion banks, and finally to the retail sector[28]. Remember the Indian government essentially has been attacking India’s culture in the name of fiscal balance.

The consequence: an explosion of gold smuggling. Cases of smuggling has shot up to 205 from 21 a year earlier, value of gold seized by officials has soared by 10 times or 270 million rupees compared to 25 million rupees over the same period, according to the Wall Street Journal[29]

So at the end of the day, the formal sector ends up in the informal ‘illegal’ sector. The government forced the average Indians to migrate underground to maintain tradition. Practicing tradition have now been rendered as illegitimate and a crime. Many will suffer from political oppression out of the insensitive and inhumane whims of the political leaders.

It is still nice to see that the average Indians still have practiced civil disobedience via smuggling. But if the political repressive dragnet intensifies, then perhaps it will not be farfetched to expect civil disobedience to transform into violent public protests, ala Turkey, Brazil, or Egypt.

The bottom line is politicization of the economy have been key sources of social strains. What the largely economically ignorant or politically blind public initially sees as a boon from interventionism and inflationism will mostly regret of their advocacies.

And another thing, in today’s euphoric phase, I even read a commentary proclaiming today’s boom as “unstoppable”.

Well Mr. Tetangco has just fired the warning shot across the proverbial bow. Yet if bond markets continue to unsettle, what has been bruited as “unstoppable”…will not only become stoppable, but they will likely stop soon.

Despite the recent advances, current environment remains risky.

Trade cautiously.

---

[1] Malaya.com Tetangco: We will stay the course July 10, 2013

[2] Bloomberg.com Philippines Doesn’t Need Additional Stimulus, Tetangco Says July 26, 2013

[3] See Phisix in the Shadows of a Bursting Global Bond Market Bubble June 24, 2013

[4] Ludwig von Mises 1. Inflation III. INFLATION AND CREDIT EXPANSION Interventionism An

[5] Bangko Sentral ng Pilipinas Economic and Financial Statistics

[6] Tradingeconomics.com PHILIPPINES GDP CONSTANT PRICES

[7] Ludwig von Mises 11. The Money-Substitutes XVII. INDIRECT EXCHANGE Mises.org

[8] Wikipedia.org Discounted cash flow

[9] Wikipedia.org Net present value

[10] see Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[11] Inquirer.net Aquino: No stopping change July 23, 2013

[12] Fitch Rating Complete Sovereign Rating History - Fitch Ratings

[13] BBC.com Timeline: The unfolding eurozone crisis June 13, 2012

[14] Fitch Rating Definitions of Ratings and Other Forms of Opinion

[15] See Hyperinflation: Venezuela’s Intensifying Stock Market Melt up Amidst a Currency Meltdown June 29, 2013

[16] Carmen Reinhart and Kenneth Rogoff, This Time is Different Princeton University Press p. 111

[17] Ibid p. 15

[18] See A US-Philippines Bases Treaty (2012 Edition) in the Making? January 26, 2012

[19] Inquirer.net Aquino defends use of bases by US, Japan July 3, 2013

[20] See Phisix: The Myth of the Consumer ‘Dream’ Economy July 22, 2013

[21] See China’s Railroad Stimulus is now Official: It’s an $85 billion boondoggle July 25, 2013

[22] Reuters.com Japan central bank finds the pessimists come from within, July 26, 2013

[23] Sunstar Aquino seeks Congress' approval of priority measures July 22, 2013

[24] Inquirer,net Of heroes, anti-heroes: Biazon offers to quit July 23, 2013

[25] Gulf News.com Aquino: Philippines not Asia’s smuggling capital April 11, 2013

[26] New York Times Unusual Political Career of Calvin Coolidge, Never Defeated for an Office, January 6, 1933

[27] See Gold Smuggling: A Deepening Trend Not Just in the Philippines November 24, 2013

[28] See Why the Indian Government’s War on Gold will Fail May 18, 2013

[29] Wall Street Journal Gold Smuggling Takes Off in India July 26, 2013