The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility

 

Devaluing is a de facto default and the manifestation of the insolvency of a nation—Daniel Lacalle 

In this Issue

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

Part I: The USD-Philippine peso Breach at Php59

IA. The Soft Peg’s Strain Finally Shows

IB. "Market Forces" or Managed Retreat?

IC. Gold, GIR, and the Mirage of Strength

ID. Historical Context: Peso Spikes and Economic Stress

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending

IIB. Misclassified Investment, ICOR and the Productivity mirage

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67?

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

How the BSP’s widening savings–investment gap, soft peg, flood control response left the peso exposed—and what it reveals about the Philippine economy.

Part I: The USD-Philippine peso Breach at Php59 

IA. The Soft Peg’s Strain Finally Shows 

This is what we posted at X.com 

After three years, $USDPHP breaks the BSP’s 59 Maginot line. What cracked it?

• 👉 Record savings–investment gap (BSP easing, deficit spending, CMEPA)
• 👉 BSP soft peg (gold sales)
• 👉 Capital controls fueling flight
• 👉 Weak economy + high debt 

The soft peg’s strain finally shows. 

After three years of tacit defense, the BSP’s 59.00 line cracked on October 28. Yet it closed the week—and the month—at 58.85, just below what we’ve long called the BSP’s ‘Maginot line.’ 

IB. "Market Forces" or Managed Retreat? 

The BSP and media attributed the breach to “market forces.” But if the peso’s rate is truly market-determined, why issue a press release at all? To reassure the public? Why the need for reassurance? And if the breakout were merely “temporary,” why frame it at all—unless the goal is to condition perception before the markets interpret the breach as systemic or draw their own conclusions?

Figure 1

Another dead giveaway lies in the BSP’s phrasing: it “allows the exchange rate to be determined by market forces.” (Figure 1, upper image)

That single word—allows—is revealing. 

It presupposes BSP supremacy over the market, implying that exchange rate movements occur only at the central bank’s discretion. FX determination, in this framing, is not a spontaneous process but a managed performance. Market forces operate only within the parameters permitted by the BSP. “Allowing” or “disallowing” thus reflects not market discipline, but bureaucratic control masquerading as market freedom. 

Yet, the irony is striking: they cite “resilient remittance inflows” as a stabilizer—even as the peso weakens. If OFW remittances, BPO earnings, and tourism inflows are as strong as claimed, what explains the breakdown? 

Beneath the surface, the pressures are unmistakable: thinning FX buffers, rising debt service, and the mounting cost of defending a soft peg that was never officially admitted.

IC. Gold, GIR, and the Mirage of Strength

Then there’s the gold angle. 

In 2024, the BSP was the world’s largest central bank seller of gold—offloading reserves to raise usable dollars. (Figure 1, lower chart)

Figure 2

Now, higher gold prices inflate its GIRs on paper—an accounting comfort masking liquidity strain. It’s the same irony we saw in 2021–22, when the BSP sold gold amid a pandemic recession and the peso still plunged. (Figure 2, upper graph) 

Adding to the drama, the government announced a price freeze on basic goods just a day before the peso broke Php 59. Coincidence—or coordination to suppress the impact? 

And there was no “strong dollar” to blame. The breakout came as ASEAN peers—the Thai baht, Indonesian rupiah, Singapore dollar, and Malaysian ringgit—strengthened. This was a PHP-specific fracture, not a USD-driven move. (Figure 2, lower table) 

ID. Historical Context: Peso Spikes and Economic Stress

Figure 3

Historically, sharp spikes in USDPHP have coincided with economic strain:

• 1983 debt restructuring
• 1997 Asian Financial Crisis
• 2000 dotcom bubble bust
• 2008–2010 Global Financial Crisis
• 2020 pandemic recession (Figure 3, upper window)

The BSP even admitted “potential moderation in economic growth due in part to the infra spending controversy” for this historic event. That makes reassurance an even more potent motive. 

Remember: USDPHP made seven attempts to breach 59.00—four in October 2022 (3, 10, 13, 17), three from November 21 and 26 to December 19, 2024. That ceiling revealed the BSP’s implicit soft peg. The communique doesn’t explain why the eighth breach succeeded—except to say it was “market determined.” But that’s just another way of saying the market has abandoned the illusion of BSP control. (Figure 3, lower diagram)

As I’ve discussed in earlier Substack notes, this moment was years in the making: 

• The widening savings–investment gap
• CMEPA’s distortions
• Asset bubbles, the creeping financial repression and fiscal extraction that eroded domestic liquidity 

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

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending 

Spending drives the economy.  That ideology underpins Philippine economic policy—from the BSP’s inflation targeting and deficit spending to its regulatory, tax, and FX regimes—and it has culminated in a record savings–investment (SIG) gap. 

This is the Keynesian hangover institutionalized in Philippine policy—confusing short-term demand management with sustainable capital formation 

But this is not merely technocratic doctrine; the obsession with spending anchors the free-lunch politics of ochlocratic social democracy. 

Yet even the SIG is a flawed metric. 

As previously discussed, “savings” in national accounts is a residual GDP-derived figure riddled with distortions, not an empirical aggregation of household or corporate saving. It even counts government savings—retained surpluses and depreciation allowances—when, in truth, fiscal deficits represent outright dissaving. (see reference) 

Worse, the inclusion of non-cash items such as depreciation and retained earnings inflates measured savings, masking the erosion of actual household liquidity.

IIB. Misclassified Investment, ICOR and the Productivity mirage 

Even the “investment” side is overstated. Much of it is public consumption misclassified as capital formation. Because politics—not markets—dictate pricing and returns, the viability of monopolistic political projects cannot be credibly established. 

Consider infrastructure. Despite record outlays, the Incremental Capital-Output Ratio (ICOR) has worsened—proof that spending does not equal productivity.

Figure 4

According to BSP estimates, the Philippines’ ICOR has fallen from around 8.3 in the 1989-92 period to approximately 4.1 in 2017-19, contracted by 12.7% and recovered to around 3.0 by 2022 (see reference) (Figure 4, topmost visual) 

While the ICOR trend suggests some efficiency gains since the 1990s, it remains a blunt and often misleading proxy—distorted by GDP rebasing, project misclassification, and delayed returns. What it does reveal, however, is the widening gap between spending and sustainable productivity 

Listed PPP firms, meanwhile, sustain appearances through leverage, regulatory capture and forbearance, and mark-to-model accounting. The result is concealed fragility, reinforced by the hidden costs of various acts of malfeasance, conveniently euphemized as by the public as “corruption.” 

In the end, the SIG tells a simple truth: domestic savings are too scarce to fund both public and private investment. The gap is bridged by FX borrowing. 

But this is not a sign of strength—it’s a symptom of deepening structural dependence, masked by monetary theater and fiscal illusion, thus amplifying peso vulnerability. Every fiscal impulse now imports external leverage, entrenching the illusion of growth at the expense of stability. 

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown 

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology 

Spending-as-growth isn’t just policy—it’s pathology.

While the BSP’s mandate is "to promote price stability conducive to balanced and sustainable growth," its inflation-targeting framework—tilted toward persistent monetary easing—has effectively become a GDP-boosting machine to finance free-lunch political projects. 

Banks have realigned their balance sheets accordingly. Consumer loans by universal and commercial banks rose from 8.2% of total lending in December 2018 to 13.5% in August 2025—a 64% surge—while the share of industry loans declined from 91.7% to 86.5% over the same period. (Figure 4, middle pane) 

Fueled by interest rate subsidies and real income erosion, households are leveraging aggressively to sustain consumption. Yet as GDP growth slows, the marginal productivity of credit collapses—meaning every new peso of debt generates less output and more fragility for both banks and borrowers. 

Production credit’s stagnation also forces greater import dependence to meet domestic demand.

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits 

Meanwhile, deficit spending—now nearing 2021 pandemic levels—artificially props up consumption at the expense of productivity gains. (See reference for last week’s Substack.) 

Together, credit-fueled consumption and fiscal excess have produced record "twin deficits." (Figure 4, lowest chart) 

The fiscal deficit widened from Php 319.5 billion in Q2 to Php 351.8 billion in Q3, while the trade deficit expanded from USD 12.0 billion to USD 12.76 billion—levels last seen in 2020. 

Historically, fiscal deficits lead trade gaps—it raises import demand. If the budget shortfall hits fresh records by year-end, the external imbalance will likely push the trade deficit back to its 2022 peak.

Figure 5

These deficits are not funded by real savings but by credit—domestic and external. The apparent slowdown in approved public foreign borrowings in Q3 likely masks rescheduling (with Q4 FX borrowings set to spike?), delayed recognition, shift to BSP-led financing (to reduce scrutiny) or accounting prestidigitation (Figure 5, topmost diagram) 

Public external debt accounted for roughly 60% of the record USD 148.87 billion in Q2. Even if Q3 slows, the trajectory remains upward. (Figure 5, middle graph) 

In short, widening twin deficits mean more—not less—debt. 

Slowing consumer sales growth, coupled with rising real estate vacancies, signals that private consumption is already being crowded out—a deepening symptom of structural strain in the economy.

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

Yet the newly enacted CMEPA (Capital Market Efficiency Promotion Act, R.A. 12214) deepens the financial repression: it taxes savings, institutionalizes these by redirecting or diverting household savings into state-controlled channels or equity speculation, and discriminates against private-sector financing. By weakening the deposit base, it also amplifies systemic fragility. The doubling of deposit insurance last March, following RRR cuts, appears preemptive—an implicit admission of the risk CMEPA introduces. 

Authorities embraced a false choice. Savers are not confined to pesos—they can shift to dollars or move capital abroad entirely. Capital flight is not theoretical; for the monied class, it can be a reflexive response. 

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis 

The recent “flood control” corruption scandal has merely exposed the deeper rot. 

Consensus recently blames the peso’s fall and stock market weakness on “exposed corruption.” But this is post hoc reasoning: both the peso and PSEi 30 peaked in May 2025—months before the scandal broke. (Figure 5, lowest image)

Corruption, as argued last week, is not an aberration—it’s embedded or a natural expression of free-lunch social democracy 

It begins at the ballot box and metastasizes through centralization, cheap money, financial repression, the gaming of the system and rent-seeking. It explains the entrenchment of political dynasties and the extraction economy they operate on. 

What media and the pundits call “corruption” is merely the visible tip. The deeper pathology is malinvestment—surfacing across: 

• Bank liquidity strains
• Wile E. Coyote NPLs
• Record real estate vacancies
• Slowing consumer spending despite record debt
• Cracks in employment data
• Persistently elevated self-rated poverty ratings (50% + 12% borderline as of September).
• Stubborn price pressures and more… 

The BSP’s populist response to visible corruption? 

Capital controls, withdrawal caps, probes, and virtue signaling. These have worsened the erosion of confidence, potentially accelerating the flight to foreign currency—and escalating malinvestments in the process. (see reference) 

What emerges is not just structural decay, but a slow-motion confidence collapse. 

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant 

And there is more. The BSP also operates a de facto FX soft-peg regime. 

By keeping a lid on its tacit thrust to devalue, its implicit goal is not merely to project macro stability, but to subsidize the USD and manage the CPI within its target band. Unfortunately, this policy overvalues the peso, encouraging USD-denominated borrowing and external savings while providing the behavioral incentive for capital flight.

Figure 6

Including public borrowing, the weak peso has prompted intensified growth in the banking system’s FX deposits. In August 2025, FX deposits rose 11.96%—the second straight month above 10%—reaching 15.07% of total bank liabilities, the highest since November 2017. (Figure 6, topmost window) 

The BSP’s FX regime also includes its reserves management—Gross International Reserves (GIR).

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns 

As noted above, similar to 2020–2021, the BSP embarked on massive gold sales to defend the USDPHP soft peg. Yet the peso still soared 22.97% from 47.90 in May 2021 to 58.9 in September 2022. That pandemic-era devaluation coincided with a CPI spike—peaking at 8.7% in January 2023. The 2024 gold sales echo this pattern, offering a blueprint for where USDPHP could be heading. 

The BSP insists that benchmarks like the GIR assure the public of sufficient reserves. Yet it has never disclosed the composition in detail. Gold—which the BSP remains averse to—accounts for only ~15% of the GIR (September). A former BSP governor even advocates selling gold "to profit” from it." (2020 gold sales and devaluation occurred in his tenure) 

But since the BSP doesn’t operate for profit-and-loss, but for political objectives such as "price stability," this logic misrepresents intent.

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap 

A significant portion of GIR—around 5%—consists of repos, derivatives, and other short-term instruments classified as Other Reserve Assets (ORA), introduced during the 2018 peso appreciation. Not only that: national government borrowings deposited with the BSP are also counted as GIR. Hence, “borrowed reserves” make up a substantial share. (Figure 6, middle graph) 

If reserves are truly as strong as officially claimed, why the peso breakout—and the need for a press release? 

All this is reflected in the stagnating growth of BSP net foreign assets (NFA) since 2025, reinforcing a downtrend that began in 2013. While nominally at Php 6.355 trillion, NFA is down 2.1% from the record Php 6.398 trillion in November 2024. (Figure 6, lowest diagram)

Figure 7

This fragility is also evident in the balance of payments (BOP) gap. Though narrowing in recent months, it reached USD 5.315 billion year-to-date—its highest since the post-pandemic recession of 2022. That’s 67% of the November 2022 peak. (Figure 7, topmost graph) 

The apparent improvement merely reflects deferred pressure—delayed borrowings and import compression. 

Despite BSP claims, net outflows reflect more than trade gaps. They signal external debt servicing amid rising leverage, capital flight, and systemic strain.

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67? 

Last March, we wrote: 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61–62 range. (see reference) 

At the time, our lens was historical—measuring breakout levels from 2004 to 2022 and projecting forward to 2025. 

But as noted above, USDPHP spikes rarely occur in a vacuum. They tend to coincide with economic stress. Using BSP’s end-of-quarter data, we find: (Figure 7, middle table) 

• 1983 debt restructuring: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.15% over 6 quarters (Q1 1997–Q3 1998)
• 1999–2004 dotcom bust: +30.6% over 20 quarters (Q2 1999–Q1 2004)
• 2007–2009 Global Financial Crisis: +16.95% over 5 quarters (Q4 2007–Q1 2009)
• 2020–2022 pandemic recession: +22.64% over 7 quarters (Q4 2020–Q3 2022) 

While the USDPHP also rose from 2013–2018, this episode was largely driven by the Fed’s Taper Tantrum, China’s 2015 devaluation, and Trump-era fiscal stimulus—with no comparable economic event.

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The current moment is different. 

Using the post-2022 low—Q2 2025 at 56.581—as a base, a 10% devaluation implies a target of 62.24. But with the late-cycle unraveling, a weakening domestic economy, and rising debt burdens, the odds tilt towards a deepening of stagflation—or worse. If the peso mirrors its pandemic-era response, a 20% devaluation to 67.90 is not far-fetched. 

Even the BSP now concedes "potential moderation in economic growth." 

Yet it continues to cite “resilient inflows” like tourism. The Department of Tourism data tells another story: as of September 2025, foreign arrivals were down 3.5% year-on-year—hardly a sign of strength. (Figure 7, lowest chart) 

Otto von Bismarck’s maxim applies: 

Never believe anything in politics until it has been officially denied. 

Hounded by diminishing returns and Goodhart’s Law—where every target becomes a distortion—the BSP clings to benchmarks that no longer signal strength. From the USDPHP to GIR composition, Net Foreign Assets, and FX deposit ratios, the metrics have become theater. The more they’re defended, the less they reflect reality.

In the face of unraveling malinvestments, deepening institutional opacity, and accelerating behavioral flight, the BSP is whistling past the graveyard. 

Caveat emptor. The illusion is priced in.  

____ 

References 

Bangko Sentral ng Pilipinas, Discussion Paper Series No. 2024-10: Estimating the Incremental Capital Output Ratio (ICOR) for the Philippines, Towards Greater Efficiency: Estimating the Philippines’ Total Factor Productivity Growth and its Determinants BSP Research Academy, June 2024. 

Prudent Investor Newsletters: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

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

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 27, 2025 

The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? Substack, March 03, 2025 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, Substack, January 02, 2025 

June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

 

Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter—Ludwig von Mises 

In this issue

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

I. The Goldilocks Delusion: Rate Cuts as Ritual

II. Cui Bono: Government as the Primary Beneficiary

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge

IV. Minsky’s Warning: Fragility Beneath the Easing

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay

VIII. The War on Cash and the Politics of Liquidity

IX. The War on Cash Disguised as Corruption Control

X. From Cash Limits to Systemic Liquidity Locks

XI. The Liquidity Containment Playbook and the Architecture of Control

XII. Curve-Shaping and Fiscal Extraction

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis 

From rate cuts to cash caps: how the BSP’s containment playbook reshapes power and fragility in the Philippine economy

I. The Goldilocks Delusion: Rate Cuts as Ritual 

In delivering its “surprise” seventh rate cut for this August 2024 episode of its easing cycle, the BSP chief justified their decision on four grounds: 

• 1 Outlook for growth has softened in the near term
• 2 Growth was weaker because demand is weaker. This, in turn, is why inflation is low
• 3 Governance concerns on public infrastructure spending have weighed on business sentiment
• 4 “We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent.” 

For a supposedly data-dependent political-monetary institution, the BSP never seems to ask whether rate cuts have delivered the intended results—or why they haven’t. The rate-cut logic rests on a single pillar: the belief that spending alone drives growth. 

In reality, the BSP’s spree of rate and reserve cuts, signaling channels, and relief measures has produced a weaker, more fragile economy.

Figure 1

GDP rates have been declining since at least 2012, alongside the BSP’s ON RRP rates. Yet none of this is explained by media or institutional experts. These ‘signal channeling’ tactics are designed for the public to unquestioningly accept official explanations. (Figure 1, upper chart) 

II. Cui Bono: Government as the Primary Beneficiary 

Second, cui bono—who benefits most from rate cuts? 

The biggest borrower is the government. Its historic deficit spending spree hit an all-time high in 1H 2025, reaching a direct 16.71% share of GDP. This is supported by the second-highest debt level in history—ballooning to Php 17.468 trillion in August 2025—and with it, surging debt servicing costs. (Figure 1, lower window) 

As explained in our early October post: 

• More debt → more servicing → less for everything else
• Crowding out hits both public and private spending
• Revenue gains won’t keep up with servicing
• Inflation and peso depreciation risks climb
• Higher taxes are on the horizon 

The likely effect of headline “governance concerns” and BSP’s liquidity containment measures—via capital and regulatory controls—is a material slowdown in government spending. In an economy increasingly dependent on deficit outlays, this amplifies what the BSP chief calls a “demand slowdown.” 

In truth, the causality runs backward: public spending crowding out and malinvestments cause weak demand. 

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge 

Banks are the second biggest beneficiaries. Yet paradoxically, despite the BSP’s easing cycle, the growth rate of bank lending appears to have hit a wall.

Figure 2

Gross Non-Performing Loans (NPL) surged to a record Php 550 billion up from 5.4% in July to 7.3% in August. (Figure 2, topmost image)

Because lending growth materially slowed from 11% to 9.9% over the same period, the gross NPL ratio rose from 3.4% to 3.5%—the highest since November 2024. This is the Wile E. Coyote moment: credit velocity stalls and NPL gravity takes hold. 

As we noted in September: 

“Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold.” 

Even BSP’s own data confirms that the past rate cuts have barely permeated average bank lending rates. As of July 2025, these stood at 8.17%—still comparable to levels when BSP rates were at their peak (8.23% in August 2024). The blunting of policy transmission reveals deep internal imbalances. (Figure 2, middle graph) 

Production loans (9.8%) signaled the slowdown in lending, while consumer loans (23.4%) continued to sizzle in August. The share of consumer loans reached a historic 15.5% (excluding real estate loans). (Figure 2, lowest visual) 

IV. Minsky’s Warning: Fragility Beneath the Easing 

The BSP’s admission that the economy has softened translates to likely more NPLs and an accelerating cycle of loan refinancing. Whether on the consumer or supply side, this incentivizes rate cuts to delay a reckoning 

From Hyman Minsky’s Financial Instability Hypothesis, this deepens the drift toward Ponzi finance: insufficient cash flows from operations prompt recycling of loans and asset sales to fund mounting liabilities. (see Reference)

Figure 3

As major borrowers, lower rates also benefit banks’ own borrowing sprees. While banks trimmed their August bond and bill issuances (-0.79% YoY, -3.7% MoM, share down from 6.52% to 6.3%), both growth rates and shares remain on an uptrend. (Figure 3, topmost graph) 

The slowdown in bank borrowing stems from drawdowns from BSP accounts—justified by recent reserve rate ratio (RRR) cuts. BSP’s MAS reported a Php 242 billion bounce in liabilities to Other Depository Corporations (ODC) in August, reaching Php 898.99 billion. (Figure 3, middle diagram) 

Ultimately, the seventh rate cut—deepening the easing cycle—is designed to keep credit velocity ahead of the NPL surge, hoping to stall the reckoning or spark productivity-led credit expansion. Growth theater masks the real dynamics. 

Rate cuts today are less about the economy and more about survival management within the financial system. 

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide 

MSME lending—the most vital segment—continues to wane. Its share of total bank lending fell to a paltry 4.6% in Q2, the lowest since 2009. Ironically, MSME lending even requires a mandate. BSP easing has little impact here. (Figure 3, lowest visual) 

Some borrowers engage in wholesale lending or microfinancing—borrowing from banks to relend to SMEs. But if average bank lending rates haven’t come down, why would this segment benefit? 

Informal lenders, who fill the gap left by banks, absorb this risk—keeping rates sticky, as in the case of 5-6 lending. 

If lending to MSMEs remains negligible, who are the real beneficiaries of bank credit?

The answer: elite-owned, politically connected conglomerates.

Figure 4

In 1H 2025, borrowings of the 26 non-financial PSEi members reached a record Php 5.95 trillion—up Php 423.2 billion YoY, or 7.7%. That’s about 16.92% of total financial resources (TFR) as of June 2025. Bills Payable of the PSEi 30’s 4 banks jumped 64.55% YoY to P 859.7 billion. (Figure 4, topmost graph) 

This concentration is reflected in total financial resources/assets: Philippine banks, especially universal-commercial banks, hold 82.7% and 77.1% of total assets respectively as of July. 

Mounting systemic fragility is being masked by deepening concentration. A credit blowup in one major sector or ‘too big to fail’ player could ripple through the financial system, capital markets, interest rate channel, the USD–PHP exchange rate—and ultimately, GDP. 

The structure of privilege and fragility is now one and the same.

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation 

The BSP chief even admitted "demand is weaker. This, in turn, is why inflation is low."

Contrastingly, when authorities present their CPI data, the penchant is to frame inflation as a supply-side dynamic. Yet in our humble opinion, this marks the first time that the BSP confesses to a demand-driven CPI. 

September CPI rose for the second consecutive month—from 1.5% to 1.7%. If the ‘governance issues’ have exacerbated the demand slowdown, why has CPI risen? Authorities pointed to higher transport and vegetable prices as the culprit. 

Yet core CPI slowed from 2.7% in August to 2.6% in September, suggesting that the lagged effects of earlier easy money have translated to its recent rise. 

But that may be about to change. 

The drop in core CPI to 2.6% YoY was underscored by its month-on-month (MoM) movement, as well as the headline CPI’s MoM, both of which were flat in September. Historically, a plunge in MoM tends to signal interim peaks in CPI. (Figure 4, middle and lowest diagrams) 

So, while the unfolding data suggest that public spending may slow and bank lending continues to decelerate, “demand is weaker” would likely mean not only a softer GDP print but an interim “top” in CPI. 

If inflation reflects weak demand, labor data should show the same — yet the opposite is being claimed 

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay 

Authorities also produced another remarkable claim—on jobs.

Figure 5

They say employment rates significantly rebounded from 94.67% in July to 96.1% in August, even as the August–September CPI rebound supposedly showed that “demand is weaker.” This rebound was supported by a sudden surge in labor force participation—from 60.7% in July to 65.06% in August. (Figure 5, topmost and middle charts) 

The PSA’s employment data defies structural logic. Labor swings like stocks despite rigid labor laws and weak job mobility. The data also suggest that the wide vacillation in jobs indicates abrupt shifts between searching for work and refraining from doing so—as reflected in the steep changes in labor force participation. 

Furthermore, construction jobs flourished in August even amid flood-control probes, reflecting either delayed fiscal drag—or inflated data, to project immunity of labor markets from governance scandals. (Figure 5, lowest graph) 

Yet high employment masks poor-quality, low-literacy work—mostly in MSMEs—which explains elevated self-rated poverty and hunger rates. 

Additionally, both employment and labor force data have turned ominous: a rounding top in employment rates, while labor force participation also trends downward. 

Despite tariff woes, the slowdown in manufacturing jobs remains moderate. 

Nonetheless, beneath this façade, record consumer credit and stagnant wages reveal a highly leveraged, increasingly credit-dependent household sector. 

Labor narrative inflation—the embellishment of job metrics—would only exacerbate depressed conditions during the next downturn, leading to sharper unemployment. 

When investors interpret inaccurate data as fact, they allocate resources erroneously. The resulting imbalances won’t just show up in earnings losses—they’ll manifest as outright capital consumption. 

And while public spending may be disrupted, authorities can always divert “budget” caught in controversies to other areas. 

That said, jobs decay could rupture the banks propping up this high-employment illusion. 

VIII. The War on Cash and the Politics of Liquidity 

This week puts into the spotlight two developments which are likely inimical to the banking system, the economy and civil liberties. 

This Philstar article points to the banking system’s implementation of the BSP’s Php 500,000 withdrawal cap, which took effect in October. 

We earlier flagged seven potential risks from the BSP’s withdrawal limit: financial gridlock that inhibits the economy; capital controls that permeate into trade; indirect rescue of the banking system at the expense of the economy; possible confidence erosion in banks—alongside CMEPA; tighter credit conditions; rising risk premiums and capital flight; and, finally, the warning of historical precedent. (see reference) 

For instance, we wrote, "these sweeping limits target an errant minority while penalizing the wider economy. Payroll financing for firms with dozens of employees, capital expenditures, and cash-intensive investments and many more aspects of commerce all depend on such flows." 

The Philstar article noted, "Several social media users, particularly small business owners, expressed frustration over the stricter requirements and said that the P500,000 daily cash limit could disrupt operations and delay payments to suppliers."

Sentiment is yet to diffuse into economic numbers, but our underlying methodological individualist deductive reasoning is on the right track. 

IX. The War on Cash Disguised as Corruption Control

One of the critical elements in the BSP withdrawal cap is its requirement that the public use ‘traceable channels.’

The “traceable channels” clause reveals the BSP’s dual intent. 

On media, it’s about anti–money laundering and transaction transparency. In practice, it forces liquidity to remain inside the banking perimeter—deposits, e-wallets, and interbank transfers that cannot exit as cash. 

Cash, the last bastion of transactional privacy and immediacy, is being sidelined. This is not a war on crime; it’s a war on cash. 

The effect is to silo money within the formal system, preventing it from circulating freely across the real economy.

Figure 6

In August, cash-to-deposit at 9.84% remained adrift near all-time lows, while the liquid-asset-to-deposit ratio at 47.72% hit 2020 pandemic lows—both trending downward since 2013. (Figure 6, topmost pane) 

X. From Cash Limits to Systemic Liquidity Locks 

What looks like a compliance reform is, in truth, a liquidity containment measure. 

By capping withdrawals at Php 500,000, the BSP traps liquidity in banks already facing balance sheet strain. This buys temporary stability, allowing institutions to meet reserve ratios and avoid visible stress, but it starves the cash economy—especially small businesses dependent on operational liquidity. 

Economic losses eventually translate to non-performing loans, erasing whatever short-term relief liquidity traps provided. When firms struggle to repay, banks hoard liquidity to protect themselves—contracting credit and deepening the slowdown. The policy cure becomes the crisis catalyst. 

XI. The Liquidity Containment Playbook and the Architecture of Control 

This is not an isolated act; it fits a broader policy playbook: 

• Easy Money Policies: Reduce the cost of borrowing in favor of the largest borrowers, often at the expense of savers and small lenders. 
• CMEPA: The Capital Market Efficiency Promotion Act, which expands regulatory reach over capital flows and market behavior, while rechanneling private savings toward state and quasi-state instruments. 
• Soft FX Peg: The USDPHP peg, designed to constrain inflation, masks currency fragility and limits monetary flexibility. 
• Price Controls: MSRP ceilings distort price signals and suppress market clearing, especially in essential goods. 
• Administrative Friction: Regulatory hurdles replace fiscal support, extracting compliance and liquidity rather than injecting relief. 

Add to that the BSP’s ongoing yield curve-shaping—suppressing long-term yields to sustain public debt rollover—and what emerges is a clear strategy of financial containment: liquidity is captured, redirected, and immobilized to defend a strained financial order. 

XII. Curve-Shaping and Fiscal Extraction 

The post–rate cut yield curve behavior in the Philippines reveals a dual narrative that’s more tactical than organic. On one hand, the market is signaling unease about inflation—particularly in the medium term—yet it stops short of pricing in a runaway scenario. This ambivalence is reflected in the belly of the curve, where yields have dropped sharply despite flat month-on-month CPI and only modest year-on-year upticks. (Figure 6, middle and lowest graphs) 

On the other hand, the BSP appears to be engineering a ‘bearish steepening’ through tactical easing, likely aimed at supporting bank margins and stimulating credit amid a backdrop of rising NPLs, slowing loan growth, and liquidity hoarding. 

The rate cut, coming on the heels of July’s CMEPA and amid regulatory tightening, suggests a deliberate attempt to offset balance sheet stress without triggering overt inflation panic. 

Each of these measures—cash caps, regulatory absorption of savings, and engineered curve shifts—forms part of a single containment architecture. What looks like fragmented policy is, in reality, coordinated liquidity triage. 

In sum, fiscal extraction, liquidity controls, and curve manipulation are now moving in tandem. Each reinforces the other, ensuring that capital cannot easily escape the system even as trust erodes. 

The war on cash, then, is not about corruption or transparency—it’s about preserving liquidity in a system that has begun to run dry.

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost 

And then the BSP hopes to expand its extraction-based “reform.” This ABS-CBN article reports that the central bank plans to issue "a new policy on a possible threshold for money transfers which will cover even digital transactions." It would also empower banks to "refuse any transaction based on suspicion of corruption." 

Ironically, BSP Governor Eli Remolona cited as an example a contractor’s ‘huge’ withdrawal from the National Treasury—deposited into a private account—which he defended as "legitimate." 

The war on financials is evolving—from capital controls to behavioral nudging to arbitrary discretionary thresholds. BSP’s move to cap money transfers reframes liquidity as suspicion, and banks as moral adjudicators. 

Discretion to refuse transactions—even without proof—creates a regime where access to private property is conditional, not on law, but on institutional discomfort. 

Remolona’s defense of a bank that released a “huge amount” to a contractor despite unease confirms what we’ve recently argued: the scandal was never hidden—it was institutionally tolerated. 

Bullseye! 

Two revelations from this: 

First, it validates that this venal political-economic framework represents the tip of the iceberg—supported by deeply entrenched gaming of the system, extraction, and control born of top-heavy policies and politics. 

Two. It serves as a Kindleberger’s timeless signpost—that swindles, fraud, and defalcation are often signals of crashes and panic: 

"The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud." (Kindleberger, Bernstein)

In this sense, the BSP’s moralistic posture and arbitrary discretion may not be acts of reform, but symptoms of a system inching toward its own reckoning. The façade of prudence conceals a liquidity-starved order struggling to maintain legitimacy—where control replaces confidence, and “reform” becomes a euphemism for survival. 

All this suggests that, should implementation be rigorous, the recent earthquakes may not be confined geologically but could spill over into financial institutions and the broader economy. If these signify a “do something” parade of ningas cogon policies, then the moral decay born of the public spending spree will soon resurface. 

Either way, because of structural sunk costs, the effects of one intervention diffusing into the next guarantees the acceleration and eventual implosion of imbalances that—like a pressure valve—will find a way to ventilate. 

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

Finally, the BSP admits to either being afflicted by a knowledge problem or propagating a red herring: "We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent." 

This confession exposes the technocratic folly of believing that economic equilibrium can be engineered by formula. It ignores the fundamental truth of human action—there are no constants—and the perennial lesson of Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure. Protecting the status quo, therefore, translates to chasing short-term fixes while evading long-term consequences. 

What this reveals is not calibration but confusion—policy reduced to trial-and-error within a liquidity-starved system. The “Goldilocks” rhetoric masks a deeper instability: that each attempt to fine-tune the economy only amplifies the distortions born of past interventions. 

We close this article with a quote from our October issue: 

"The irony is stark. What can rate cuts achieve in “spurring demand” when the BSP is simultaneously probing banks and imposing withdrawal caps? 

And more: what can they do when authorities themselves admit that CMEPA triggered a “dramatic” 95-percent drop in long-term deposits, or when households are hoarding liquidity in response to new tax rules—feeding banks’ liquidity trap?" 

____

References 

Ludwig von Mises, Bureaucracy, p.119 NEW HAVEN YALE UNIVERSITY PRESS 1944, mises.org 

Hyman P. Minsky, The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College, May 1992 

Charles P Kindleberger & Peter L. Bernstein, The Emergence of Swindles, Manias Panics and Crashes, Chapter 5, p.73 Springer Nature link, January 2015 

Prudent Investor Newsletter, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 5, 2025 

Prudent Investor Newsletter, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, Substack, August 24, 2025 

Prudent Investor Newsletter, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025