The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

 

THE question of deficit finance is at the center of public discussion of economic matters today, as it is in any society undergoing serious price inflation, and as it should be, for there is no more basic connection in economic affairs than that linking deficit finance and inflation. Though Milton Friedman's aphorism that ''inflation is always and everywhere a monetary phenomenon'' is true (or as true as economic aphorisms get), it is equally true that sustained monetary expansions are always and everywhere a consequence of printing money to cover the difference between Government expenditures and tax revenues—Robert E. Lucas 

In this issue

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback

III. Revenue Performance: Strong Headline, Weak Underpinnings

A. May 2025 Revenue Dynamics

B. Five-Month Revenue Trends

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets

V. The Politics of Economic Forecasting and Revenue Implications

VI. Public Spending Patterns: Election Effects and Structural Trends

A. May 2025 Expenditure Analysis

B. Five-Month Spending Trends

C. Budget Execution and Future Projections

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb

A. Interest Payment Trends

B. Financing Implications

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

 

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock? 

Fiscal Theater vs. Market Reality: A Critical Look at the 2025 Budget Trajectory Using May and 5-month Performance as Blueprint 

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative 

This article is an update to our previous piece titled “Is the Philippines on the Brink of a 2025 Fiscal Shock?" 

Are Philippine authorities becoming increasingly desperate in their portrayal of economic health? Is there an escalating reliance on "benchmark-ism"—the artful embellishment of statistics and manipulation of market prices—to project an aura of ‘sound macroeconomics?’ 

Beyond the visible interventions—such as the quasi-price controls of Maximum Retail Prices (MSRPs) and the Php 20 rice initiatives, which signal low inflation—amid the emerging disconnect between market dynamics and banking conditions, does May’s fiscal deficit reflect political signaling? 

This article dissects the National Government’s (NG) fiscal performance for May 2025 and the first five months of the year, revealing structural nuances behind the headline figures and questioning the sustainability of current fiscal policies.

Figure 1

The Bureau of Treasury (BTr) reported: "The National Government’s (NG) fiscal position significantly improved in May 2025, with the budget deficit narrowing to Php 145.2 billion from Php 174.9 billion in the same month last year. This lower deficit was primarily driven by a robust 13.35% growth in revenue collections, alongside a moderation in expenditure growth to 3.81% during the national elections month. The cumulative deficit for the five-month period reached Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year (YoY), as the government accelerated investments in infrastructure and social programs to support inclusive growth. NG remains on track to meet its deficit target for the year through prudent fiscal management and efficient use of resources, in line with its Medium-Term Fiscal Program" (BTr, June 2025) [bold added] [Figure 1, upper graph] 

However, beneath the fog of political rhetoric, the election-induced public spending cap—mainly on infrastructure—appears to be the true catalyst behind May's reported budget improvement. The temporary restraint on government expenditures during the electoral period created an artificial enhancement in fiscal metrics that masks underlying structural concerns. 

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback 

Examining the January-to-May period reveals a more complex narrative. The stated deficit of "Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year" actually reflects a substantial revision in March spending that resulted in a lower reported deficit. 

March public spending was revised downward by 2.2% or Php 32.784 billion, from Php 654.984 billion to Php 622.2 billion. This revision cascaded into a 5.9% reduction in the five-month deficit, from the original Php 556.7 billion to the revised Php 523.9 billion. Authorities attributed this revision to "trust transactions." 

Despite this rollback, the current deficit represents the THIRD-highest level on record, trailing only the unprecedented Php 566.204 billion and Php 562.176 billion recorded in 2021 and 2020, respectively. [Figure 1, lower chart]

Figure 2

Those record-high deficits reflected ‘fiscal stabilization’ policies during the pandemic recession, when deficit-to-GDP ratios reached 7.6% and 8.6% amid negative GDP growth of -8.02% in 2020 (pandemic recession) and +8.13% in 2021 in nominal terms, or -9.5% and +5.7% in real GDP terms.  (Figure 2, topmost window)  

Of course, these were funded by all-time high public debt (excluding indirect liabilities incurred by private firms under PPP projects). 

Remarkably, without a recession on the horizon, the five-month deficit has already surpassed the budget gaps of the last three years (2022-2024) and appears likely to either match or even exceed the 2020-2021 levels. 

This trajectory stands in stark contrast to authorities' optimistic target of a 5.3% deficit-to-GDP for 2025—revised to 5.5% just last week. Just 5.5%! Amazing. 

With financial markets seemingly complacent—barely pricing in any surprises—would the eventual revelation that the early 2025 deficit “blowout” might mimic the fiscal health of 2020–2021 trigger a significant market shock? 

Or has the risk premium been quietly numbed by a narrative of “contained inflation” and headline-driven optimism? 

In this climate, the interplay between fiscal slippage and monetary posture warrants closer scrutiny. If macro fundamentals continue to diverge from market sentiment, will the ‘bond vigilantes’ remain silent—or are they simply biding their time? 

III. Revenue Performance: Strong Headline, Weak Underpinnings 

While the five-month headline figures for revenues and expenditures did set new nominal records, the underlying structural details will ultimately dictate the fiscal year's trajectory. 

A. May 2025 Revenue Dynamics 

Total revenues grew by 13.35% in May 2025, slightly below the 14.6% recorded in May 2024. Tax revenues, comprising 75% of total revenues, expanded by 6.25%—nearly double the 3.35% growth rate of May 2024. This improvement was driven by the Bureau of Internal Revenue's (BIR) robust 10.71% growth, while the Bureau of Customs (BoC) contracted by 6.94%, contrasting with 2024's respective growth rates of 3.35% and 4.33%. 

Non-tax revenues surged 40.9% in May 2025, though this paled compared to the 98.6% spike recorded in May 2024. 

B. Five-Month Revenue Trends 

May's revenue outperformance lifted the cumulative five-month results. From January to May 2025, total revenue grew by 5.4%, representing significant deceleration from the 16.34% surge in the corresponding 2024 period. (Figure 2, middle diagram) 

Tax revenues, accounting for 89.7% of total collections, increased by 10.5%, marginally down from 2024's 11.2%. The BIR demonstrated resilience with 13.8% growth compared to 12.8% in 2024. However, the BoC stagnated with a mere 0.22% increase, dramatically lower than the previous year's 6% growth. 

Despite May's surge, non-tax revenues contracted by 24.8% in the first five months of 2025, a sharp reversal from the 60.6% growth spike recorded last year. 

While the BIR shows resilience, the BoC and non-tax revenues lag, signaling vulnerabilities in revenue diversification. 

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets 

Authorities markedly lowered their GDP target for 2025. According to ABS-CBN News on June 26, "The Philippines has again revised its growth target for the year, citing heightened global uncertainties such as the conflict in the Middle East and the imposition of US tariffs. The Development and Budget Coordination Committee on Thursday said it was targeting an economic growth range of 5.5 to 6.5 percent. In December last year, the target for 2025 was set at 6 to 8 percent." (bold added) (Figure 2, lower image) 

The BSP's June rate cut also hinted at growth moderation. As reported by ABS-CBN News on June 19: "BSP Deputy Governor Zeno Abenoja said the central bank also eased rates due to the possible 'moderation' in economic activity." (bold added) 

The most striking revision involved reducing the upper end of the growth target from 8% to 6.5%—a substantial markdown that signals underlying economic concerns! 

V. The Politics of Economic Forecasting and Revenue Implications 

The Development Budget Coordination Committee (DBCC), as an inter-agency body, represents an inherently political institution plagued by ‘optimism bias’—the tendency to overestimate GDP growth. This bias stems from multiple sources: political pressure to maintain public confidence for approval ratings, the need to justify ambitious economic targets for budget and spending projections, and the imperative to maintain access to affordable financing through public savings. 

Authorities also embrace the Keynesian concept of ‘animal spirits,’ believing that overly optimistic predictions boost business and consumer confidence, thereby spurring increased spending to drive GDP growth. 

Likewise, by promoting investor sentiment, they hope that buoyant markets will create a ‘wealth effect’ that further bolsters spending and economic growth. Rising asset markets may translate capital gains into increased consumption, while higher collateral values encourage more debt-financed spending to energize GDP. 

However, because authorities rely on “data-dependent” approaches, they turn to economic models anchored in historical data and rigid assumptions—often constructed through ex-post analysis. 

Yet effective forecasting requires more than backward-looking templates; it demands grappling with the complexities of purposive human action, where theory operates not as a passive derivative of data, but as a deductive logical framework for validation or falsification. 

As economist Ludwig von Mises observed: 

"Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories." (Mises, 1998) (bold added) 

Because the DBCC relies on “data-dependent” econometric models that essentially project the past into the future, authorities attempt to smooth out forecasting errors through revisions. 

They often rely on ‘availability bias or heuristic’ to inject perceived relevance into their projections.  

They also embrace ‘attribution bias’—crediting positive developments as their accomplishments, while assigning blame for adverse outcomes to exogenous factors. 

Last week’s GDP downgrade exemplifies this pattern. Authorities cited the Middle East conflict and new US tariffs to justify the lower projections—an example of political messaging shaped by both availability and attribution biases. 

This GDP downgrade carries significant implications, as revenues depend on both economic conditions and collection efficiency. If authorities have already observed signs of economic “moderation” that warranted substantial downward revisions—yet continue to overstate targets—this suggests that actual GDP may fall well below projections. 

A lower GDP would likely erode public revenues, potentially setting off a vicious cycle of fiscal deterioration. 

VI. Public Spending Patterns: Election Effects and Structural Trends 

A. May 2025 Expenditure Analysis 

Public spending barely grew in May—the mid-term election period—increasing by only 0.22% compared to 22.24% in 2024. National disbursements remained virtually unchanged at 0.12% versus 22.22% in 2024. Local government unit (LGU) spending increased 14.5%, accelerating from 8.54% last year. Interest payments jumped 14.5% compared to 47.8% in 2024. 

The national government commanded the largest expenditure share at 69.9%, followed by LGUs at 16.15% and interest payments at 12.1%. 

B. Five-Month Spending Trends 

Though public spending in the first five months of 2025 reached record levels in peso terms, growth moderated to 9.7% from 10.6% in 2024. LGU spending growth of 13.2% exceeded 2024's 10.6%. Both national government and interest payments registered lower growth rates of 9.24% and 11.14% respectively, compared to 14.83% and 40% in the previous year.

Figure 3 

Despite decreased growth rates, interest payments hit record highs in peso terms, with their expenditure share reaching 14.43%—the highest level since 2010. (Figure 3, upper visual) 

C. Budget Execution and Future Projections 

The selective infrastructure ban during elections, combined with March's spending cuts, clearly reduced five-month disbursements and the fiscal deficit. Public spending in the first five months totaled Php 2.447 trillion, representing 39.16% of the annual budget. 

With seven months remaining to utilize the annual allocation of Php 6.326 trillion, government outlays must average Php 549.83 billion monthly. If the executive branch continues asserting dominance over Congress, the six-year trend of budget excess will likely extend to a seventh year in 2025. (Prudent Investor, May 2025) 

Crucially, with authorities anticipating a potential significant shortfall in GDP, the recent spending limitations due to the exercise of suffrage could translate into a substantial back-loading of the budget in June or Q3. (Figure 3, lower chart) 

That is to say, even if June 2025's deficit merely hits its four-year average of Php 200 billion, the six-month budget gap would soar to Php 723.9 billion, surpassing the 2021 record of Php 716.07 billion! 

Thus, it defies sensible logic for authorities to assert, "NG remains on track to meet its deficit target for the year through prudent fiscal management," as this would amount to a complete inversion of economic reality. 

The crucial question is, ‘how would markets react to a likely fiscal blowout?’

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb 

How will the current deficit be financed? 

A. Interest Payment Trends 

While 2025's five-month interest payment growth of 11.14% was considerably slower than 2024's 40%, nominal values reached record highs, with interest payments' share of public expenditure rising to its highest level since 2010.

Figure 4

Including amortizations, public debt servicing costs declined significantly by 42.22% compared to the previous year, which had posted a 48.5% growth spike. This wide gap primarily resulted from a 61.4% plunge in amortizations. (Figure 4, topmost graph) 

However, the five-month foreign exchange (FX) share of debt servicing accelerated dramatically from 18.94% in 2024 to 38.6% this year. (Figure 4, middle window) 

B. Financing Implications 

Several critical observations emerge from the data. 

First, authorities may currently be paying less due to scheduling reasons, 2024 prepayments, or political considerations—to avoid arousing public concern or triggering uproar over the rising national debt. 

Second, the widening deficit represents no free lunch—someone must fill the financing void. In the first five months, debt financing surged 86.24%, from Php 527.248 billion to Php 981.94 billion. (Figure 4, lowest image) 

Regardless of how authorities obscure these costs, sustained borrowing will inevitably translate into higher servicing burdens. 

As we noted last May: 

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

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

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

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

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

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)

Figure 5

Third, public debt surged 10.24% YoY to hit a fresh all-time high of Php 16.95 trillion in May and will likely continue climbing through bond issuance to finance a swelling deficit! (Figure 5, topmost pane) 

The increase in May’s public debt was partly muted by a stronger peso. The BTr noted, "The decrease was due to P3.55 billion in net repayments and the strengthening of the peso, which reduced the peso value of foreign debt by P29.35 billion." 

But of course, this represents statistical "smoke and mirrors," as FX debt will ultimately be repaid in foreign currency—not pesos. In a nutshell, the strong peso disguises the actual extent of the public debt increase. 

Fourth, despite record-high government cash holdings of Php 1.181 trillion, the Bureau of the Treasury reported a cash deficit of Php 23.14 billion in May—underscoring underlying liquidity strains. 

Fifth, banks will likely remain the primary vehicle for deficit financing. While their Held-to-Maturity (HTM) assets slightly declined from a record Php 4.06 trillion in March to Php 4.036 trillion in April, this was mirrored in net claims on the central government (NCoCG), which moderated from Php 5.58 trillion in March to Php 5.5 trillion in May (+9.36% YoY). Notably, NCoCG has closely tracked the trajectory of HTM assets. (Figure 5, topmost and middle visuals) 

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes 

Beyond government debt affecting bank liquidity conditions, competition for public savings between banks and non-financial conglomerates continues to tighten financial conditions—via liquidity constraints and upward pressure on interest rates. 

The crowding-out effect from rising issuance of government, bank, and corporate debt further diverts savings toward non-productive ends: debt refinancing, politically driven consumption, and speculative “build-and-they-will-come” ventures. 

Despite this, Philippine Treasury markets and the USD-PHP exchange rate appear defiant in the face of the BSP’s easing cycle—even as the Consumer Price Index (CPI) trends lower—as previously discussed) 

Globally, rising yields amid mounting debt loads have reawakened the specter of “bond vigilantes”—their resurgence partly driven by balance sheet reductions and Quantitative Tightening. Their presence is evident in the upward drift of sovereign yields (e.g. Japan 10Y, US 10Y, Germany 10Y and UK 10Y), posing a risk that could reverberate across local markets. (Figure 5, lowest chart) 

In response, the Philippine government has redoubled efforts to lower rates through a variety of channels—ranging from quasi-price controls to market interventions to an intensified BSP easing cycle. 

Yet perhaps most telling is its increasing reliance on statistical legerdemain or "benchmark-ism"—notably, the reconstitution of the real estate index to erase prior deflationary prints, despite soaring commercial vacancy rates—a subject, of course, for another post. 

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

What authorities frame as "prudent fiscal management" increasingly looks like an exercise in political optics designed to pacify markets and voters, while deeper structural risks build beneath the surface. Headline improvements in the deficit mask the reality of slowing revenue momentum, surging financing needs, rising reliance on FX debt, and a likely surge in second-half deficit. 

As markets remain lulled by political signaling, the Philippines moves closer to a fiscal reckoning — one where statistical smoothing and policy theater will no longer suffice. 

The key question: how will markets and the public react when the full weight of these imbalances becomes undeniable? 

___

References 

Bureau of Treasury, National Government’s Budget Deficit Narrows to Php 145.2 Billion in May 2025 Amid Sustained Strong Revenue Growth June 26, 2025 https://www.treasury.gov.ph/

Ludwig von Mises, Human Action, p.348 Mises Institute, 1998, Mises.org 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, Substack May 4, 2025

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

 

Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver 

In this issue

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP?

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

IV. The USDPHP Cap: A Hidden CPI Subsidy

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right? 

With price controls driving February CPI down to 2.1%, the BSP’s easing narrative gains traction—yet treasury markets remain deeply skeptical

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

ABS-CBN News, March 5: Inflation eased to 2.1 percent in February because of slower price increases in food and non-alcoholic beverages, among others, the Philippine Statistics Authority said Wednesday. In a press briefing, the PSA said food inflation slowed to 2.6 percent in February from 3.8 percent in January. The state statistics bureau noted that rice inflation further slowed to -4.9 percent from -2.3 percent in January…But the PSA noted that pork prices jumped by 12.1 percent in February, while the price of chicken meat leapt by 10.8 percent.  The cost of passenger transport by sea also soared to 56.2 percent in February.  Del Prado said the African swine fever problem continue to hurt pork prices in the Philippines. She said, however, that the Department of Agriculture’s plan to impose a maximum suggested retail price on pork may help ease price hikes. 

The Philippine government recently announced that inflation unexpectedly dropped to 2.1% in February 2025. One official media outlet hailed it a "positive surprise" in its headline. 

But is this optimism warranted? 

While the Philippine Stock Exchange (PSE)—via the "national team"—welcomed this news, interpreting it as a sign that the Bangko Sentral ng Pilipinas (BSP) could continue its loose monetary policy—essentially providing a pretext for rate cuts—the more critical Philippine treasury markets, which serve as indicators of interest rate trends, appeared to hold a starkly different view. 

As an aside, the BSP’s reserve requirement ratio (RRR) cut takes effect this March 28th, adding fuel to the easing narrative. 

The odd thing is that a critical detail has been conspicuously absent from most media coverage: on February 3, 2025, authorities implemented the "Food Emergency Security" (FES) measure. 

This policy, centered on price controls—specifically Maximum Suggested Retail Prices (MSRP)—was supported by the release of government reserves. 

Consequently, February’s Consumer Price Index (CPI) reflects political intervention rather than organic market dynamics.

Figure 1

Even more telling is an overlooked trend: the year-on-year (YoY) change in the national average weighted price of rice had been declining since its peak in April 2024—well before the FES was enacted. (Figure 1, topmost graph) 

In a nutshell, the FES merely reinforced the ongoing downtrend in rice prices, serving more as an election-year tactic to demonstrate government action "we are doing something about rice prices," rather than an actual cause of the decline. 

Nevertheless, it won’t be long before officials pat themselves on the back and proclaim the policy a triumph. Incredible. 

But what about its future implications? 

Unlike rice, where government reserves were available to support price controls, the impending implementation of MSRP for pork products next week lacks similar supply-side support. This suggests that any price stabilization achieved will be short-lived. (Figure 1, middle chart) 

As noted in February,  

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Prudent Investor, 2025)  

Nevertheless, manipulating statistics serves a political function—justifying policies through "benchmark-ism."  

Beyond food prices, which dragged down the headline CPI, core CPI also eased from 2.6% in January to 2.4% in February. 

Despite this pullback, the underlying inflation cycle appears intact. (Figure 1, lowest image) 

Government narratives consistently frame inflation as a ‘supply-side’ issue or blame it on "greedflation," yet much of their approach remains focused on demand-side management through BSP’s inflation-targeting policies. 

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP? 

Authorities claim that employment rates have recently declined but remain near all-time highs. 

But how true is this?

Figure 2

The employment rate slipped from an all-time high of 96.9% in December 2024 to 95.7% in January 2025—a level previously hit in December 2023 and June 2024. (Figure 2, topmost image) 

Remarkably, despite near-full employment, the CPI continues to slide. 

Officials might argue this reflects productivity gains.  But that claim is misleading.

Consumer credit growth—driven by credit cards and supported by salary loans—has been on a record-breaking tear, rising 24.4% YoY in January 2025, marking its 28th consecutive month above 20%. (Figure 2, middle window) 

Yet, unlike the 2021-2022 period, headline CPI has weakened. 

Could this signal diminishing returns—mainly from refinancing? 

Beyond CPI, total Universal-Commercial (UC) bank loans have surged since Q1 2021—unfazed by official interest rate levels. (Figure 2, lowest diagram)

Figure 3

The slowing growth in salary loans seems to mirror the CPI’s decline. (Figure 3, upper pane) 

And it’s not just inflation. 

Despite an ongoing surge in Universal-Commercial (UC) bank loans since Q1 2021—regardless of official interest rate levels—weak consumption continues to weigh on GDP growth. The second half of 2024 saw GDP growth slow to just 5.2%. (Figure 3, lower chart) 

This boom coincides with record real estate vacancies, near unprecedented hunger rates, and almost milestone highs in self-reported poverty. 

So, where has demand gone? 

In January 2025, UC bank loans (both production and consumer) increased by 13.27% year-on-year. 

Are the government’s employment figures an accurate reflection of labor market conditions? Or, like CPI data, are they another exercise in "benchmark-ism" designed to persuade voters and depositors that the political economy remains stable? 

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

Figure 4 

Ironically, bank financing of the government, as reflected in Net Claims on the Central Government (NCoCG), continues to soar—up 7.4% year-on-year to PHP 5.41 trillion in January 2025, though slightly down from December 2024’s historic PHP 5.54 trillion. 

Meanwhile, since bottoming at 1.5% in April 2023, BSP currency issuance has trended upward, accelerating from May 2024 to January 2025, when it hit 11% YoY. (Figure 4, topmost graph) 

Despite this massive liquidity injection—via bank lending and government borrowing—deflationary forces persist in the CPI. 

Where is this money flowing? What "financial black hole" is absorbing the injected liquidity? 

IV. The USDPHP Cap: A Hidden CPI Subsidy 

The recent weakness of the US dollar—primarily due to a strong euro rally following U.S. President Trump’s pressure on Europe to increase NATO contributions—has driven up the region’s stock markets, particularly defense sector stocks. This, in turn, has triggered a global bond selloff.

The euro’s strength has also bolstered ASEAN currencies, including the Philippine peso. 

As predicted, the BSP’s cap on the USD-PHP exchange rate— a de facto subsidy—has fueled an increase in imports. In January, the nation’s trade deficit widened by 17% to USD 5.1 billion due to a 10.8% jump in imports. (Figure 4, middle window) 

Further, to defend this cap, the BSP sold significant foreign exchange (FX) in January, only to replenish its Gross International Reserves (GIR) in February via a USD 3.3 billion bond issuance. The BSP attributes the GIR increase to "(1) national government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, (2) upward valuation adjustments in the BSP’s gold holdings due to the increase in the price of gold in the international market, and (3) net income from the BSP’s investments abroad." (Figure 5, lowest visual) 

This disclosure confirms the valuable role of gold in the BSP’s reserves. 

In short, the USD-PHP cap has not only subsidized imports but has also artificially suppressed the official CPI figures. 

From 2015 to 2022, the ebbs and flows in the USD-PHP exchange rate were strongly correlated with CPI trends.  

Figure 5

However, since 2022, when the exchange rate cap was strictly enforced, this relationship has broken down, increasing pressure on the credit-financed trade deficit and necessitating further borrowing to sustain both the cap and the Gross International Reserves (GIR). (Figure 5, topmost image) 

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

First, while global bond yields have risen amid the European selloff, this has not been the case for most ASEAN markets—except for the Philippines. This suggests that domestic factors have been the primary driver of movements in the ASEAN treasury markets, including the Philippines. (Figure 5, middle and lowest graphs)

Figure 6

Second, it is important to note that institutional traders dominate the Philippine treasury markets. This dynamic creates a distinction between the public statements of their respective "experts" and the actual trading behavior of market participants—"demonstrated preferences." 

The apparent divergence between the CPI and Philippine 10-year bond yields—despite their previous seven-year correlation—reveals disruptions caused by other influencing factors. (Figure 6, upper chart) 

Or, while analysts often serve as institutional cheerleaders for the traditional market response to an easing cycle, traders seem to be reacting differently.

Finally, further cementing this case for decoupling, the Philippine yield curve steepened (bearish steeper) during the week of the CPI announcement—suggesting that treasury markets are pricing in future inflation risks or tighter policy, potentially discounting the recent CPI decline as temporary. (Figure 6, lowest graph) 

All in all, while the government and the BSP claim to have successfully contained inflation, treasury markets remain highly skeptical—whether about the integrity of the data, the sustainability of current policies, or both. 

Our bet is on the latter.

___

References  

Prudent Investor, January 2025 2.9% CPI: Food Security Emergency andthe Vicious Cycle of Interventionism February 10, 2025

 

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

 

Speculation is a name given to a failed investment and… investment is the name given to a successful speculation–-Edward Chancellor 

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

In this issue

I. Year of the Snake: Trump’s Baptism of Fire:  Declares War on Interest Rates 

II. Asian Markets Embraces Trump’s Inaugural Risk-On Rally: Stronger Currencies, Falling Bond Yields, and Equity Gains 

III. Philippine Peso Rallies as the Philippine Raises in $3.29 Billion in Bonds, Yield Curve Steepens 

IV. The PSEi 30 Misses out on the Electrifying Surge in Global Risk-Taking Appetite; the January Effect and More on the Chinese Zodiac Cycle 

V. Will This Week's Q4 GDP Announcement Alter the PSEi 30's Pervasive Negative Sentiment? 

VI. PSE Activities: Financial Casino for the Big Boys 

VII. Foreign Selling Drives PSEi 30 Decline, Low Savings Contribute to Thin Market Volume and the Sunk Cost Fallacy 

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

Trump 2.0 opens with a declaration of war against interest rates. Global and Asian markets cheer. The Philippine peso rallies, the Treasury yield curve steepens, while the PSEi 30 trails behind its Asian peers.

I. Year of the Snake: Trump’s Baptism of Fire:  Declares War on Interest Rates

Donald Trump kicks off his presidency with a bang. 

He fired his opening salvo against the U.S. Federal Reserve, demanding they slash interest rates and threatening to raise tariffs on OPEC members if they fail to lower oil prices. 

In a video message to the World Economic Forum (WEF) in Davos, Switzerland, he stated(via Reuters): "I'll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. I’m also going to ask Saudi Arabia and OPEC to bring down the cost of oil." (bold and italics mine) 

He also softened his stance on China, refraining from arbitrarily imposing tariffs.

Bloomberg/Yahoo Finance reported: "We have one very big power over China, and that’s tariffs, and they don’t want them," the U.S. leader told Fox News host Sean Hannity in an interview that aired Thursday in the U.S. "And I’d rather not have to use it. But it’s a tremendous power over China." (italics mine)

Either Trump’s advisors suggested that slashing interest rates could slow inflation, or, as we noted two days before the U.S. election, tariffs were seen as an instrument or tool for his trade policies, much like in Trump 1.0. 

Perhaps also, in recognition that ongoing wars contribute to supply disruptions and thus influence interest rates, President Trump suspended foreign aid for 90 days.

This move could apply pressure on both Ukraine and Israel in their pursuit of continued warfare or military objectives. The U.S. government has provided billions in financing and material support to sustain the conflicts in Ukraine (at least USD 69.5 billion according to the U.S. State Department) and Israel (USD 12.5 billion as reported by the Council on Foreign Relations).

If we are not mistaken, most of the critical actions taken during his first week were interconnected and could have been designed to curb inflation and lower interest rates. 

However, Trump has been notably reticent about addressing the snowballing deficit spending, which is currently at an all-time high. 

With the possibility of easy money in the air, U.S. and global markets celebrated Trump’s inauguration. The major U.S. equity benchmark, the S&P 500, hit a record high, while Bitcoin neared its all-time high, and the crypto market entered a hyper-volatile phase. The US oil benchmark, WTIC, fell 3.5% over the week. 

According to the Wall Street Journal, "The crypto industry eagerly awaited Donald Trump’s return to the White House. Now, it’s reeling after the president and first lady launched a pair of meme coins. Dubbed $TRUMP and $MELANIA, the tokens serve no economic purpose—their value is largely driven by internet meme popularity. Since their launch Friday night, the market cap of the president’s coin has surged to $8.4 billion, while the first lady’s token is valued at approximately $800 million, according to CoinMarketCap." (italics mine) 

Trump's ascension has ignited hyper-volatility in the crypto sphere, epitomizing the intensification of resource misallocation, symptomatic of an entrenched and deepening global speculative mania. 

Is this a sign of its terminal phase? 

Similarly, as stated last week, Trump’s administration, which begins in the Year of the Snake, "promises to be a period of intense geopolitical activity, where traditional alliances might be tested, and new power dynamics could emerge, all under the ambitious and often unpredictable deal-making leadership." 

Trump’s first week in office marked a baptism by fire for geopolitics, the global economy, and financial markets. 

Of course, one week doesn’t make a trend.

II. Asian Markets Embraces Trump’s Inaugural Risk-On Rally: Stronger Currencies, Falling Bond Yields, and Equity Gains 

How has all this affected Asia?

Figure 1

First, the U.S. Dollar Index $DXY fell by 1.8%, marking its largest weekly drop since November 2023, primarily due to a 2.2% gain in the euro $EURUSD.

The DXY, an index measuring the U.S. dollar's value against a basket of foreign currencies, fell from a two-year high. This drop might reflect overbought conditions or could be a relief countertrend activity spurred by Trump's actions. 

Despite this, the sinking dollar lifted all Asian currencies quoted by Bloomberg. The U.S. dollar weakened most against the Malaysian ringgit $USDMYR, Thai baht $USDTHB, and South Korean won $USDKRW. (Figure 1)

Figure 2

Next, the U.S. Treasury market hardly reacted to the dollar’s steep decline, with yields on 10-year notes falling only marginally. 

However, yields on most ASEAN treasuries dropped significantly, or ASEAN bond prices rallied strongly. The Philippines, in particular, mirrored its U.S. Treasury counterpart $TNX. (Figure 2)

Figure 3

Lastly, with the prospect of easy money, 13 of the 19 national indices in Asia closed the week higher, averaging a 0.73% return in local currency terms. Sri Lanka’s Colombo and Mongolia’s MSE both hit their respective all-time highs. Sri Lanka, Japan's Nikkei 225, and Hong Kong's Hang Seng Index were among the top performers for the week. (Figure 3, upper window) 

Rallies in Japan and Hong Kong benchmarks reached the resistance levels of their respective trading ranges. (Figure 3, lower chart) 

III. Philippine Peso Rallies as the Philippine Raises in $3.29 Billion in Bonds, Yield Curve Steepens

And what of the Philippines? 

Figure 4

Despite a strong rally among its regional peers, the USD-PHP exchange rate slipped by 0.56% week-over-week, largely due to a 0.7% rally on Friday. (Figure 4, topmost image) 

This comes amidst the National Government's successful $3.29 billion bond sale, which included U.S. dollar and euro-denominated bonds, some of which were sustainability-focused offerings. The funds raised are intended to help finance the government’s budget, according to Reuters and Interaksyon. 

Muted gains, despite significant U.S. dollar and euro inflows for Q1 2024? There could be more borrowings in the coming two months. 

For example, the Bangko Sentral ng Pilipinas (BSP) reported $3.21 billion in approved foreign borrowings for Q4 2024: "For the period from October to December 2024, the Monetary Board approved six (6) public sector medium- to long-term foreign borrowings, amounting to $3.21 billion. This is 3.35% (or $0.11 billion) lower than the $3.32 billion in foreign borrowings approved for the same period last year." (italics added) 

Approved loans have been on an upward trend since at least Q4 2022, with a notable spike in Q1 2023, followed by a dip in Q2 before continuing to trend higher. (Figure 4, middle diagram) 

These approved loans are part of the BSP’s external borrowings, meaning higher debt loads will result in higher debt-servicing costs, which include both principal repayment and interest expenses—exacerbating the Philippines’ US dollar "short" conditions. (Figure 4, lowest graph) 

Furthermore, National Government borrowings deposited with the BSP should contribute to the Gross International Reserves (GIR), though this represents "borrowed reserves" that require debt servicing. 

The focus on maintaining benchmarks to project an image of sound macroeconomics is, in reality, more of a façade.

Figure 5

Secondly, not only have Philippine treasury rates been climbing from the belly to the long end of the yield curve, but they have also been transitioning into a bearish 'steepener,' with short rates reflecting the BSP's insistence on continuing its easing cycle, which raises inflation risks. 

Unknown to the public, this may be linked to the administration’s proposed "food security emergency," which was initially scheduled for implementation on January 22nd but has since been delayed "due to non-transmittal of documents," or legal technicalities. 

Like Trump, local authorities aim to curb inflation through a combination of quasi-price controls and by injecting government reserves into the marketplace under the guise of a "food security emergency". 

However, this approach fails to address the demand component, which is evidenced by record-high bank lending, unprecedented levels of public sector spending resulting in all-time high public debt, and historically high nominal liquidity conditions. 

Moreover, it misunderstands the dynamic nature of human actions, where suppressing activity in one area can lead to complex, unpredictable "multiplier" feedback loops (or second to nth-order effects) that ultimately undermine the original intent or objective. 

The effort to suppress interest rates through the "food security emergency" reflects the administration’s entrenched belief in "free lunch" politics, which the markets have resisted. 

IV. The PSEi 30 Misses out on the Electrifying Surge in Global Risk-Taking Appetite; the January Effect and More on the Chinese Zodiac Cycle

The Philippine equity benchmark, the PSEi 30, missed out on the adrenalin-powered risk-taking appetite following Trump’s inauguration and his push for a return to a global free-money regime.

Among Asia’s 19 national indices, it was one of the six equity laggards—an outlier. 

The PSEi 30 fell by 0.88%, marking its third weekly drop and pulling down its year-to-date performance to -3.56% with only a week left in January. 

The "January effect" has traditionally dominated the PSEi 30’s first-month performance, with only three declines in the last 12 years (since 2013). (Figure 5, middle pane) 

While a strong January doesn't necessarily guarantee positive annual returns, historical data shows that after three negative Januarys—2016, 2020, and 2021—the market experienced negative annual returns. Therefore, if this pattern and correlation holds, a deficit in the PSEi’s performance this January could signal that the negative trend may persist through the year. 

Moreover, January's positive returns have been slowing over time. 

Still, when viewed from the perspective of the Chinese Zodiac cycle, which follows the lunar-solar calendar rather than the contemporary Gregorian calendar, the Chinese New Year typically falls between January 21 and February 20. 

Therefore, in this context, examining PSEi 30 returns for the Year of the Snake from February to February reveals heightened volatility with a downside bias emerges: +16.7% in 1989, -12.85% in 2001, and -4.4% in 2013. 

V. Will This Week's Q4 GDP Announcement Alter the PSEi 30's Pervasive Negative Sentiment? 

The Philippine Statistics Authority (PSA) is scheduled to announce the Q4 and annual GDP figures on January 30.

In any case, the PSEi 30's weakness have emerged even before the GDP announcement. 

Historically, the week prior to the GDP release has typically resulted in positive returns, with twelve out of twenty pre-GDP weeks since 2020 showing gains. (Figure 5, lowest chart) 

On average, this has resulted in a 0.67% gain up to last week. 

That said, the PSEi 30 has suffered four consecutive negative performances in the past four pre-GDP weeks, which has weighed on its average returns amid a backdrop of slowing GDP growth.

VI. PSE Activities: Financial Casino for the Big Boys 

While the public often views the PSEi 30 as a barometer of the "market," it is important to recognize that only a few stocks drive its performance.

Figure 6

Despite the index’s recent losing streak, the top five market heavyweights still accounted for 51.7% of the index as of January 24, while the top 10 had a combined 74.1% free-float-adjusted weight. (Figure 6, upper image) 

This degree of concentration does not operate in isolation; the top 10 brokers accounted for 57.7% of this week’s trades, primarily driven by institutional brokers. 

The top 10 and 20 most traded issues made up 65.9% and 82.2% of main board volume, respectively. 

These figures highlight the concentration of trading activities among a limited set of entities, with minimal participation from retail investors and punters. 

Our humble guess is that PSE trades are dominated by third-party depository institutions like banks and other financial institutions, which constitute our "national team," operating under the indirect behest of the BSP to support the Philippine stock market. 

Since 2020, the steep bear market rallies of the PSEi 30 have been dominated by local financial institutions. 

Aside from the post-recess "afternoon delight" phenomenon, this explains the significant use of the pre-closing 5-minute floating period for both pumps and dumps (mostly pumps) to shape the PSEi’s end-of-day outcome. 

Apart from this, the establishment's embrace of "benchmarkism" or status signaling through market or economic symbols has been evident in the membership mechanics of the PSEi 30 composite.

The Philippine Stock Exchange (PSE) constructs the PSEi 30 not just to favor companies with strong price performance, but also to serve as a "moat for elite-owned and controlled firms," as we pointed out back in February 2023. 

The PSE announced changes in the PSEi 30 membership last week. It removed price laggards, including Wilcon Depot, from the downstream real estate services sector, and Nickel Asia from the nickel mining sector. 

They were replaced by AREIT, an Ayala-owned Real Estate Investment Trust, and the high-flying China Banking Corp (CBC), thereby expanding the Sy Group's influence with a second bank in the PSEi 30, effective February 3, 2025. (Figure 6, lower chart) 

Still, with low domestic savings to support stocks, foreign money flows play an instrumental role in determining the outcome of the PSEi and the PSE. 

It goes without saying that the recent sell-offs have resulted from foreign money outflows that have overwhelmed the low savings and insufficient use of credit by the 'national team' and local punters to support the index. 

VII. Foreign Selling Drives PSEi 30 Decline, Low Savings Contribute to Thin Market Volume and the Sunk Cost Fallacy

Figure 7

This week's net foreign selling of Php 1.9 billion accounted for 9.3% of gross volume. Over the last three weeks (YTD), net foreign outflows have represented 8.8% of the gross volume, which have coincided with the PSEi 30's breakdown from 6,529 in 2025. (Figure 7, topmost window) 

Although seventeen of the thirty issues closed the week lower, averaging a 0.92% decrease, the performance of the top 5-6 biggest market cap issues determined the 0.88% fall of the PSEi 30 based on free-float adjusted performance. (Figure 7, middle graph)

In short, gains from SM and BPI were insufficient to offset the declines of ICT, BDO, SMPH, AC, and ALI. 

The broader market sentiment was similarly fragile, with declining issues outnumbering advancing issues on all five trading days last week. Declining issues led by 86. This negative trend has been ongoing since the start of the year. 

On a sectoral basis, while SM led holding firms gained with 0.2%, the material declines of ICT (-3.46%) weighed on services (-2.02%), and SMPH (-3.05%) and ALI (-2.33%) pulled down the property sector (-1.99%). 

Once again, this downturn coincides with eroding volume. Main board volume slumped 21.14%, from Php 4.8 billion to Php 3.8 billion. (Figure 7, lowest diagram) 

Overall, with current "trickle-down" political-economic dynamics leading to an unparalleled savings-investment gap, the PSEi 30 would find scarce support from diminishing savings, accompanied by rising risks of debt-financed malinvestments. 

Despite support from the "National Team," which only compounds capital goods mispricing and amplifies resource malinvestments, this merely delays the inevitable: an unpalatable market clearing process or an unpleasant rectification of past mistakes. 

The first law of holes states, "If you find yourself in a hole, stop digging." Yet, the sunk-cost fallacy ensures that the mainstream will remain in vehement denial and persist in digging deeper.