Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War?

Devaluation is not a tool for exports. It is a tool for cronyism and always ends with the demise of the currency as a valuable reserve—Daniel Lacalle

In this issue 

Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War?

I. BSP Denies Currency Manipulation Amid Trade Talks

II The Mar-a-Lago Framework: Dollar Devaluation as Trade Strategy

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

IV. Market Signals Point to Implicit Bilateral Deals

V. Taiwan’s Hedging Frenzy: Collateral Damage of FX Realignment?

VI Gross International Reserves Tell a Different Story

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

VIII. Yield Spreads and Market Disruptions Signal Intervention

IX. Conclusion: The Hidden Costs of Currency Leverage; Intertemporal Risks and Economic Feedback Loops 

Is the Philippine Peso’s Rise a Secret Bargaining Chip in Trump’s Trade War? 

How the BSP's currency interventions may be hiding an implicit trade deal with Washington

I. BSP Denies Currency Manipulation Amid Trade Talks 

From a syndicated Reuters news, the Interaksyon reported May 20: "The Philippine central bank said there is no indication that its management of the peso’s exchange rate is part of trade negotiations with the U.S. government, as it signalled a preference for non-interest rate tools to manage capital inflows. The Bangko Sentral ng Pilipinas said while it expected to further ease monetary policy because of a favourable inflation outlook, it favoured a more nuanced approach to managing liquidity and exchange rate volatility. “The BSP does not normally respond to capital flow surges or outflows, or even volatility, using policy interest rate action,” the BSP said in an emailed response to questions from Reuters. Philippine officials met U.S. authorities on May 2 to discuss trade. Although not directly involved in the talks, the BSP said there was no indication foreign exchange considerations were explicitly part of the negotiations. The Philippines has not been spared from President Trump’s tariffs, although it faces a comparatively modest 17% tariff, lower than regional neighbours Malaysia, Thailand, Indonesia, and Vietnam. “The BSP adopts a pragmatic approach in managing capital flow volatility, combining FX interventions when necessary, the strategic use of the country’s foreign exchange reserve buffer, and macroprudential measures,” it said." (bold added)

II The Mar-a-Lago Framework: Dollar Devaluation as Trade Strategy 

Though the Mar-a-Lago Accord, coined by analysts like Zoltan Pozsar and popularized by Stephen Miran, is a speculative framework, it draws inspiration from the 1985 Plaza Accord, where G5 nations coordinated to depreciate the U.S. dollar to boost American exports. Stephen Miran, now Chairman of the White House Council of Economic Advisers, published a paper in November 2024 titled ‘A User’s Guide to Restructuring the Global Trading System.’ 

It argues that the U.S. dollar’s persistent overvaluation harms American manufacturing by making exports less competitive and imports cheaper, contributing to a $1.2 trillion trade deficit in 2024.

To address this, Miran proposed devaluing the dollar by encouraging foreign central banks to sell dollar assets or adjust monetary policies, while using tariffs as a ‘stick’ to pressure trading partners into currency adjustments or trade concessions.

While dedollarization—reducing reliance on the dollar in global trade and reserves—is often cited as the cause of recent dollar weakness, this may apply to countries with geopolitical tensions with the U.S., such as China or Russia or other members of the BRICs.

However, it doesn’t explain the currency strength among staunch U.S. allies like the Philippines, Japan, and South Korea, suggesting a different motive: implicit negotiations with the Trump administration.

III. Asian Geopolitical Allies Lead Currency Appreciation Against USD

Figure 1 

Year to June 13, 2025, the USD dropped against 8 of 10 Bloomberg-quoted Asian currencies, led by USDTWD (Taiwan dollar) -9.9%, USDKRW (Korean won) -7.8%, and USDJPY (Japanese yen) -8.35%. (Figure 1, topmost and middle charts) 

These countries, staunch U.S. allies that host American military bases, are the most likely to accommodate Washington’s demands. 

In ASEAN, major currencies appreciated more modestly: USDMYR (Malaysian ringgit) fell 5.05%, USDTHB (Thai baht) 5.49%, and USDPHP (Philippine peso) 2.8%. 

In contrast, USDIDR (Indonesian rupiah) rose 1.06%, indicating rupiah weakening—likely due to Indonesia's neutral stance, persistent fiscal concerns, and weaker ties to the U.S.

IV. Market Signals Point to Implicit Bilateral Deals 

On May 23, MUFG commented: "Markets have seemingly perceived that President Trump is looking for a weaker US dollar versus several Asian currencies as part of bilateral trade negotiations. Bloomberg News recently reported that the Taiwanese authorities had allowed the TWD to appreciate sharply earlier this month. The deputy governor of CBC has said that this strategic move is to allow market expectations for TWD gains to play out. But this is apparently at odds with the Taiwan central bank’s past preference to intervene in the FX market to smooth out volatility. The Korean won has also advanced sharply on the news that the US-South Korea finished the second technical discussions on 22 May." (bold added) (Figure 1, lowest graph) 

This MUFG insight—"A weaker US dollar versus several Asian currencies as part of bilateral trade negotiations"—suggests an implicit bilateral Mar-a-Lago deal.

V. Taiwan’s Hedging Frenzy: Collateral Damage of FX Realignment? 

Notably, Taiwan’s insurers recently suffered massive losses during the USD selloff and may have even contributed to it. Taiwan’s Financial Supervisory Commission (FSC) summoned insurers for reportedly “rushing to hedge their US bond holdings.” This could reflect unintended effects of TWD appreciation, potentially tied to an implicit Mar-a-Lago deal. 

In a nutshell, it’s likely no coincidence that currency appreciation aligns with the U.S.’s closest allies, suggesting implicit bilateral Mar-a-Lago deals driven by Trump’s tariff leverage, despite official denials. 

VI Gross International Reserves Tell a Different Story 

"Never believe anything in politics until it is officially denied"—Ottoman Bismark 

Taiwan’s central bank’s denial of involvement closely mirrors that of the Bangko Sentral ng Pilipinas (BSP). 

The BSP has washed its hands from using the peso as a tool for negotiation, despite the Philippines status as a client state in ASEAN, bound by the 1951 Mutual Defense Treaty and hosting U.S. military bases. 

Given the Mar-a-Lago framework of coupling dollar devaluation with tariffs, trade negotiations with the U.S. would likely involve the BSP, making its denial implausible. 

While no official agreement exists, the BSP noted it could use a combination of “FX interventions when necessary” and “the strategic use of the country’s foreign exchange reserve buffer” for capital flows management. 

This rhetoric suggests using the Philippine peso as strategic leverage for trade negotiations, aligning with the Mar-a-Lago goal of weakening the dollar to reduce the U.S.$1.2 trillion trade deficit, including the Philippines’ $5 billion surplus from $14.2 billion in exports.

VII. Breaking Historical Patterns: GIR Decline Amid Peso Strength

Figure 2 

Consider the evidence: When the USDPHP fell in 2012 and 2018, the increase BSP’s Gross International Reserves (GIR) accelerated, evidenced by aggregated monthly inflows. 

As a side note, May’s GIR saw a marginal increase, supported ironically by gold, which has served as an anchor. (Figure 2, topmost and middle images) 

Recall that last February, the BSP dismissed gold’s role, citing the "dead asset" logic: Gold prices can be volatile, earn little interest, and incur storage costs, so central banks prefer not to hold excessive amounts." Divine justice? 

Yet ironically, unlike past trends, the current USDPHP decline has led to a reduction in the GIR. (Figure 2, lowest visual) 

The BSP’s template, repeated in January, March, and April, states: "The month-on-month decrease in the GIR level reflected mainly the (1) national government’s (NG) drawdowns on its foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP) to meet its external debt obligations and pay for its various expenditures, and (2) BSP’s net foreign exchange operations." 

The USDPHP remains far from the BSP’s ‘Maginot Line’ of Php 59—the upper band of its informal ‘soft-peg’ range—so why is its GIR eroding? 

While part of the decline may be due to ‘revaluation effects’ from rising long-term U.S. Treasury yields (falling bond prices) and a softer dollar, this insufficiently explains the GIR’s decline amid an appreciating peso, contrary to historical patterns.

Figure 3

BSP data shows its net foreign assets contracted year-on-year in April 2025, the first decline since July 2023. (Figure 3, topmost diagram) 

This partly reflects changes in the FX assets of Other Deposit Corporations (ODCs), but the primary driver has been the BSP’s dollar-denominated assets. (Figure 3, second to the highest pane) 

Either we are seeing 'revaluation effects' from a GIR heavily weighted in USD assets—given that the BSP was the largest central bank gold seller in 2024, reducing its gold holdings to bolster reserves—or the BSP has been offloading some of its FX holdings to weaken the USD, thereby supporting the peso’s rise. It could be both, distinguished by scale.

VIII. Yield Spreads and Market Disruptions Signal Intervention 

The spread between 10-year Philippine and U.S. Treasury yields has drifted to its widest since 2019, when BVAL rates replaced PDST in October 2018 as the benchmark for Philippine bonds. (Figure 3, second to the lowest and lowest graphs) 

Historically, this was linked to deeper USDPHP declines, but since the BSP adopted its ‘soft-peg’ regime in 2022, its interventions have significantly reshaped this correlation—altering market signals and shifting currency allocations within the financial system

Figure 4

Weak organic FX revenues—contracting FDIs (-45.24% YoY Jan-Mar 2025), tourism (-0.82% Jan-Apr, including overseas Filipino visitors), March 2025 remittances at a 9-month low, and volatile portfolio flows ($923 million Jan-Apr)—don’t support the peso’s strength, except for services exports (+7.2% Q1 GDP). (Figure 4) 

Insufficient FX flows explain the surge in external debt, as the Philippines borrows heavily to bridge the gap, with external debt increasing to support trade, fiscal needs, and the defense of the USDPHP soft peg.

Figure 5 

Philippine external debt surged by a staggering 14% in Q1 2025, driven by a 17.4% rise in public FX debt, which now accounts for approximately 59% of the total! 

The BSP calls a sustained spike in FX debt 'manageable'—color us amazed!

IX. Conclusion: The Hidden Costs of Currency Leverage; Intertemporal Risks and Economic Feedback Loops 

These factors strengthen the case that the BSP is using the peso as leverage for trade negotiations—an implicit bilateral Mar-a-Lago deal. 

These interventions have intertemporal effects—or unintended consequences from pursuing short-term goals—that will likely surface over time. 

The USD’s decline will likely accelerate FX-denominated borrowings, becoming more evident once the peso weakens—similar to the 2018 and 2022 episodes—amplifying currency, interest rate, and other risks through mismatches that could exacerbate market disruptions. 

This poses risks of dislocations in sectors reliant on merchandise trade, remittances, or FX or USD fund flows, potentially triggering feedback loops that could negatively impact the broader economy or lead to economic and financial instability. 

And with escalating risks of a fiscal shock—one that could trigger and amplify unforeseen ramifications—that would translate into a perfect storm, wouldn’t it? 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate

 

Balance of payments crises are created in (soft) pegged arrangement because the monetary authority simultaneously targets both the exchange rate and interest rate and fails on both counts—Steve Hanke 

In this issue

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate

I. Closing 2024: Major Interventions Boost the Philippine Peso and PSEi 30

II. A Brief History of the USDPHP's Soft Peg

III. USDPHP Peg: Tactical Policy Measures: Magnifying Systemic Risks

IV. The Cost of Cheap Dollars: Financing Challenges and Soaring External Debt

V. USDPHP Peg: The Other Consequences

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate 

The Philippine peso mounted a strong rally in the last week of 2024, a hallmark of the BSP's defense of the USDPHP soft-peg regime. Why such policies would boost it past 60! 

I Closing 2024: Major Interventions Boost the Philippine Peso and PSEi 30

In the last week of December, I proposed in a tweet that the BSP and their "national team" cohorts might engage in "painting the tape" to boost Philippine asset prices during the final two trading sessions of the year.  

The BSP and their Philippine "national team" have 2 days left in 2024 to steepen Treasury markets, limit $USDPHP gains, and boost #PSEi30 returns after Friday's massive 5 minute pre-closing pump (correction: should have been Monday instead of Friday)

Figure 1 

This post turned out to be prescient. The "national team" apparently didn’t allow any major corrections on the PSEi 30 following Monday’s powerful 5-minute pump, subsequently, following it up with another two-day massive pre-closing rescue pump. (Figure 1, topmost charts)

However, the USD Philippine peso exchange rate (USDPHP) market exhibited even more prominent interventions. Despite the USD surging against 19 out of 28 pairs, based on Exante Data, the Philippine peso stood out by defying this trend, delivering the most outstanding return on December 26th. It was a mixed showing for the other ASEAN currencies. (Figure 1, middle table)

On that day too, the USDPHP traded at its lowest level from the opening and throughout the session, with depressed volatility—a clear indication of an intraday price ceiling set by the market maker, or possibly the BSP. (Figure 1, lowest graph)

By the last trading day of the year, the USDPHP weakened further, resulting in an impressive 1.64% decline over three trading sessions!

Figure 2

Notably, the Philippine peso emerged as the best-performing Asian currency during the final trading week of the year. Still, the USDPHP delivered a 4.47% return compared to the PSEi 30’s 1.22%. (Figure 2)

Figure 3

Over the past 12 years, the USDPHP has outperformed the PSEi 30 in 9 of them. Given its current momentum, this trend is likely to persist into 2025. (Figure 3, upper chart)

It is crucial to understand that such price interventions are not innocuous; they have lasting effects on the market and the broader economy.

II. A Brief History of the USDPHP's Soft Peg

The BSP employed a ‘soft peg’ or limited the rise of the USDPHP back in 2004-2005 (56.4 in 2004 and 56 in 2005).  (Figure 3, lower image)

Because of the relatively clean balance sheet following the post-Asian Crisis reforms, the BSP seemed successful—the peso rallied strongly from 2005 to 2007.

Despite the interim spike in the USDPHP during the Great Financial Crisis (GFC), it fell back to the 2007 low levels in 2013. This episode marked both the culmination of the strength of the Philippine peso and its reversal: the 12-year uptrend for the USDPHP.

Figure 4

Thanks to the expanded deployment of new tools called Other Reserve Assets (ORA), the BSP managed to generate substantial gains for the Philippine peso from 2018 to 2021. (Figure 4, upper window)

ORA includes financial derivatives (forwards, futures, swaps, and options), repos, and other short-term FX loans and assets.

However, this did not last, as the BSP launched a multi-pronged bailout of the banking system in response to the pandemic recession. The bailout comprised Php 2.3 trillion in injections (Quantitative Easing via Net claims on Central Government), aggressive RRR cuts, historic interest rate reductions, and various capital and regulatory relief measures, including subsidies. (Figure 4, lower diagram)

The USDPHP soared by about 5.4% from its 2004-2005 cap to reach the 59 level, marking the second series of its soft peg.

The USDPHP hit the 59 level four times in October 2022.

This second phase of USDPHP soft peg signified a part of the pandemic bailout measures.

Fast forward today, as the BSP maintained its implicit support via relatively elevated net claims on central government (NCoCG), the USDPHP’s 2023 countertrend rally was short-lived and rebounded through June 2024.

Promises of easy money from both the US Fed and the BSP sent a risk-on signal for global assets, including those in the Philippines sent the USDPHP tumbling to its low in September 2024.

Unfortunately, renewed signs of ‘tightening’ sent it re-testing the 59 levels three times in November-December 2024.

In short, despite recent interventions to maintain the 59 level, the numerous attempts to breach it signal the growing mismatch between the BSP’s soft peg and market forces.

III. USDPHP Peg: Tactical Policy Measures: Magnifying Systemic Risks

Yet, the BSP’s upper band limit signifies a subsidy on the USD or a price distortion that undervalues the USD while simultaneously overvaluing the peso.

This policy impacts the economy in several significant ways.

Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap.

Figure 5

It is no surprise that the trade deficit hit its all-time high in the second half of 2022 as the BSP cap went into effect.

Meanwhile, in October 2024, the trade deficit reached its third highest on record, following the USDPHP run-up through June 2024 with a quasi-upper band limit of 58.8-58.9. The USDPHP hit the 59 level twice in October. (Figure 5, upper chart)

Reduced Tourism Competitiveness: Second, an artificially strong peso (due to the cap) could make the Philippines a more expensive destination for tourists. This could reduce the country’s competitiveness in the tourism sector, ultimately impacting tourism revenue negatively.

Resource Misallocation: Third, prolonged price distortions lead to resource misallocations. In the short term, an overvalued currency might fuel consumption-driven growth due to cheaper imports. However, businesses may over-import because of the cheap USD, while exporters face challenges, with some potentially shutting down, resulting in job losses.

Over time, this could lead to overinvestment in import-related and dependent sectors while underinvestment could spur declining competitiveness in exports and tourism-related industries. These represent only the first-order effects.

The intertemporal ripple effects extend through supply and demand chains, compounding the long-term economic impact.

Inflation Risks: Fourth, the policy could exacerbate domestic inflation. While one goal of the cap is to suppress rising import costs, dwindling reserves make defending the cap increasingly difficult. Once reserves are depleted, the risk of abrupt devaluation grows, potentially defeating the policy’s original purpose.

Reduced Foreign Direct Investment (FDI): Fifth, pricier peso assets and heightened inflation risks translate to higher ‘hurdle rates’ for Foreign Direct Investments (FDI). This diminishes competitiveness and results in slow or stagnant FDI inflows, hindering long-term economic growth. Since peaking in December 2021, FDI flows have been stagnating and have shown formative signs of a downtrend since falling most last September 2024. (Figure 5, lower graph)

Increased Market Volatility: Sixth, the artificial ceiling could inadvertently magnify market volatility. Although designed to maintain stability, the widening misalignment between the USDPHP and economic fundamentals may prompt speculative pressures. If markets perceive the cap as unsustainable, the result could be a destabilizing devaluation. 

Capital Flight and Financial Instability: Finally, the growing perception of an imminent, sharp devaluation might spur capital flight from prolonged price controls, increasing the risks of financial instability. 

The Long-Term Costs of Short-Term Policies: Tactical policy measures, such as an artificial cap, magnify risks over time. These stop-gap measures are not "free lunches." Instead, they increase economic inefficiencies, contribute to stagnation, and amplify systemic risks. 

IV. The Cost of Cheap Dollars: Financing Challenges and Soaring External Debt 

On top of that, there is the critical issue of financing. 

>By keeping the dollar artificially cheap, authorities ENCOURAGE USD debt accumulation. This policy may amplify medium- to long-term vulnerabilities, particularly in the face of rising global interest rates or a stronger dollar. 

>Depleting Reserves and Surging External Debt: The artificial ceiling requires substantial central bank intervention through the use of foreign reserves. However, prolonged interventions deplete these reserves and may compel the government to borrow externally to replenish them, thereby increasing public debt. 

Unsurprisingly, external debt soared in Q3 2024. 

What’s more, since the National Government’s (NG) net foreign currency deposits with the BSP include proceeds from the NG's issuance of ROP Global Bonds, external debt inflates the BSP’s Gross International Reserves (GIR).

Figure 6 

Still, the level and growth of Q3 external debt continue to outpace the GIR. (Figure 6, topmost image) 

As a side note, GIR fell by USD 2.6 billion to USD 108.5 billion last November.

>Increasing Refinancing and Liquidity Strains:

As I recently noted, 

rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Prudent Investor, November 2024)

Increasing requirements for refinancing have only magnified the US dollar shortage, amplifying a race to borrow that heightens the risk of abrupt exchange rate adjustments or repayment shocks.

Additionally, banks (+34.14% YoY) and non-financial institutions (+5.5%) have also been ramping up their external debt. However, government borrowings (+18.7%) continue to outpace those of the private sector (in mil USD). (Figure 6, middle diagram) 

>Growing Short-Term Debt Concerns: Worse yet, while the BSP describes the present growth pace of external debt as "sustainable," short-term external debt has hit a record, and its share of the total has also expanded in Q3. (Figure 6, lowest window) 

The rapid rise in short-term debt is a symptom of mounting US "dollar shorts" or developing liquidity strains, which are likely to be magnified by the BSP’s caps. 

>Rising Debt Crisis Risk: Although one implicit objective of maintaining a USDPHP cap is to artificially lower the cost of debt servicing, the removal of this cap or an eventual devaluation could cause the cost of servicing foreign-denominated debt to skyrocket in local currency terms, potentially triggering a debt crisis. 

Figure 7

Eleven-month debt servicing costs have already hit a record (compared with same period and against the annual), partly due to the increasing share of foreign-denominated debt. Imagine where these costs would land if the USDPHP exchange rate breaches the 60 level!

V. USDPHP Peg: The Other Consequences

And that’s not all. 

The artificial peg may lead to additional consequences:

>Moral Hazard: Economic actors might engage in risky financial behavior, such as excessive USD borrowing, expecting government intervention to shield them from losses by perpetually maintaining a cheap dollar policy.

>Policy Tradeoffs: The BSP’s prioritization of exchange rate stability could worsen imbalances brought about by past and present monetary policy stances.

>Black Market Emergence: As USD supply becomes restricted due to prolonged interventions, a parallel or black market for the dollar may emerge.

>Social Inequality: The benefits of an artificially cheap dollar often skew toward wealthier individuals, who gain access to inexpensive foreign goods and international investment opportunities. In contrast, low-income households may face rising prices for basic goods—especially domestically produced ones—because local producers struggle with higher input costs or reduced competitiveness. 

>Economic Inequality: Moreover, such policies disproportionately favor certain groups, such as importers or holders of foreign currency-denominated assets (and related industries), and USD borrowers, at the expense of others, including exporters, local producers and savers.

>Trade Relations and Currency Manipulation Risks: A significant trade deficit driven by an undervalued dollar could strain trade relationships, potentially inviting retaliatory measures from trading partners or complicating trade negotiations. 

In extreme cases, accusations of "currency manipulation" could lead to sanctions by organizations such as the WTO. These sanctions might allow affected countries to impose tariffs on imports from the Philippines. 

All these factors point to one conclusion: the USDPHP is likely headed past 60 soon.

____

References

Prudent Investor US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar November 25, 2024

 

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness

 

GDP is the most common out-of-context stat used by governments to convince the citizenry that all is well. It is yet another stat that is entirely manipulated by inflation. It is also manipulated by the way in which modern governments define "economic activity"—Brandon Smith

 

In this issue:

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

II. Why the GDP is Not the Economy

III. Net Exports as Key Driver of Q1 2024 GDP

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

XI. Summary and Conclusion

 

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization

The 5.7% GDP growth in Q1 2024 highlights net exports as the primary driver, alongside the trend toward financialization and a significant deceleration in consumer spending.

 

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

 

Reuters, May 9, 2024: The Philippine economy accelerated less than expected in the first quarter as weaker consumer spending restrained growth, reinforcing expectations that the central bank will leave interest rates unchanged next week, despite rising inflation. Gross domestic product grew 5.7% in the first three months from the same period last year, the statistics agency said on Thursday, up from the previous quarter's 5.5% but below the 5.9% forecast in a Reuters poll.

 

Let us begin this analysis by examining the GDP trend.

Figure 1 

After the Q4 seasonal breach, Q1’24 GDP dropped back to the exponential trendline support level, reinforcing it. (Figure 1, upper chart)

 

Originating from the pandemic recession in 2020, the secondary trend indicates that GDP growth will be significantly slower than in the pre-pandemic era.

 

Q1 GDP’s confirmation of this trendline validates our analysis from last November:

 

Regardless of consensus opinion, the coming GDPs will likely bounce within the range of the second trendline marked by the ceiling (exponential trend) and the floor (trend support).  The percentage change will be a function of base effects. (Prudent Investor 2023) [bold original]

 

It also implies that any pompous projections that disregard this trendline are likely to deviate.

 

Additionally, given the fragility of the nascent trendline and considering the evolving internal conditions, the likelihood leans towards a downside break rather than an upside.

 

Of course, since expenditures underpin GDP, authorities could induce another breach through monetary easing—essentially flooding the economy with currency—similar to the 2020 episode. However, this would result in a surge of inflation, which should offset the initial effects.

 

Or, incidences of an upside break could be "transitory" or unsustainable.

 

As a side note, the Philippine Statistics Authority (PSA) revised the national accounts data from Q1 2022. 

 

II. Why the GDP is Not the Economy

 

The GDP is a statistical construct of the economy, calculated based on technical assumptions embedded in its model. This model presupposes a perspective that the economy is centrally or top-down driven, making GDP a political statistic susceptible to biases and subject to the stratagem of incumbent political authorities, without any (independent) auditing process.

 

For example, the headline GDP can be inflated by understating inflation. While inflation increases the top-line or nominal numbers, a suppressed inflation rate widens the gap—the real or headline GDP. (Figure 1, lower graph)

 

One of the primary purposes of "painting the GDP tape " is to provide the government with easy access to the public’s income and savings by justifying taxes and borrowings, while another is to rationalize the exercise of political control over its subjects.

 

Furthermore, news headlines may portray a different economic landscape than that presented by the statistical economy

 

Here are some of the latest:

 

-Businessworld, March factory output falls, steepest in almost 2 years, May 9, 2024

-Inquirer.net, Over 5,000 PH garment factory workers lose jobs May 7, 2024

-ABS-CBN News, SM Investments Q1 net income up 6 percent at P18.4 billion but retail slips, May 8, 2024

-Manila Standard, Trade deficit narrowed to $3.2b as exports, imports fell in March, May 8,2024

-Inquirer.net, SWS: Families who suffer from hunger rises to over 14%; highest rate in NCR, May 01,2024

-GMA News, NCR office space rental prices seen to drop as vacancy levels increase — JLL, April 25, 2024

-GMA News, SWS poll: 46% of Filipino families consider themselves poor, April 25, 2024

 

Even if we somehow reckon that the GDP numbers reflect reality, who benefits from it? Cui bono? These headlines suggest it was not the average Filipinos.

Yet, why is there a difference in the presented number and the headlines?

 

Moreover, if the weighted average of the inflation rates of billionaires and the street poor can be considered as apples-to-oranges, wouldn’t calculating a similar weighted average growth for software design fees and palay harvesting result in a similarly flawed representation of the economy?

 

III. Net Exports as Key Driver of Q1 2024 GDP

Let us examine the expenditure side of the GDP.

Figure 2

 

Consumers were visibly scrimping while the government was also in a penny-pinching mode. Their real GDPs were up by only 4.6% and 1.7% in Q1 2024, respectively. (Figure 2, topmost image)

 

However, government spending excludes government construction and other capex expenditures.

 

Meanwhile, stagnation also affected gross capital formation, and imports, which grew by 1.3% and 2.3%, correspondingly. (Figure 2, second to the highest diagram)

 

On the other hand, exports (goods and services) which surged by 7.5%, delivered the goodies—via the net export route (exports minus imports).

 

In essence, exports signified the cornerstone of Q1 2024’s growth.

 

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

 

But other data on merchandise trade from the Philippine Statistics Authority presents a different perspective.

 

Exports in USD shrank by 7.6%. But due to peso devaluation, they rose by 6.9% when calculated using the average peso for the period. (Figure 2, second to the lowest left graph)

 

Semiconductor exports, which accounted for 46% share last March, contracted by .18% after a sizzling 32% growth last February. Though semicon exports (in million USD) bounced in March, it has been on a downtrend since its zenith in October 2022. (Figure 2, second to the lowest right chart)

 

The export slump partially explains the labor retrenchment in garment factories and the two-year drop in factory output.

 

The cited export data pertains solely to goods exports, which, in the context of the GDP, accounted for 46% of the total. Services represented the majority.

 

On the other hand, since the pinnacle in 2022, stagnation has also affected imports of capital and consumer goods (in millions USD).

 

Although consumer imports increased by 6.6% last March, capital goods imports plunged by 14.8%—marking the third straight monthly drop and its largest decline since August 2023.

 

Importantly, since reaching its peak in 2022, global trade (in millions USD) has significantly slowed. (Figure 2, lowest window)

 

Could this be symptomatic of the intensifying geopolitical tensions and monetary disorders?

 

In summary, a substantial segment in the increase in the GDP can be attributed to the effects of peso devaluation! The money illusion!

 

That is to say, inflation presented as economic growth!

 

Incredible.

 

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

 

But why the sustained slowdown of consumer spending?

Figure 3

 

Despite the labor force reaching the second-highest employment (or second-lowest unemployment) rates in Q1 2024, consumer per capita income tumbled to its lowest level since 2021! (Figure 3, topmost chart)

 

Why would more jobs lead to reduced consumption? Could it be that the public has increased their savings?

 

Interestingly, retail, government (public administration and defense), and financial sectors have spearheaded year-to-date (YTD) employment gains. (Figure 3, middle image)

 

Has the surge in defense jobs signified a partial transition to a war economy?

 

Despite a 6% drop in March, part-time jobs accounted for 30% of the employed population. (Figure 3, lowest diagram)

 

Part-time jobs comprised almost all of the job gains last February (Prudent Investor, 2024)

 

Could the employment numbers have been exaggerated to boost the GDP and the approval ratings of the administration, or were the increases in jobs primarily low-quality positions?

 

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

 

Furthermore, bank lending, primarily through consumers, played a crucial role in driving household consumption and industry GDP.

Figure 4

 

Universal commercial banks saw a significant 9.45% increase in their lending portfolio in March/Q1 2024, marking the third consecutive quarterly growth and reaching its highest level since Q1 2023. (Figure 4, topmost graph)

 

Household borrowing surged at a rapid pace of 25.4%, marking the seventh consecutive quarter of over 20% growth and the highest rate since Q2 2020!

 

In the meantime, production loans also saw growth, rising by 7.7% for the third consecutive quarter, reaching the highest level since Q1 2023.

 

In other words, without the growth in bank credit, consumer GDP would have cratered, potentially causing the GDP to contract!

 

Alternatively, even with the magnified use of consumer credit, the downward trend in household spending growth persists.

 

What would the household GDP look like without it?

 

Nevertheless, this represents a symptom that credit has supported household expenditures rather than productivity growth.

 

In the face of high inflation, consumers resorted to borrowing from banks and financial institutions to sustain their lifestyles.

 

But that’s not all; they have also drawn from their savings.

 

Consequently, for the banked population, this resulted in a sharp slowdown in peso savings growth from 3.13% in February to 2.15% in March. (Figure 4, middle diagram)

 

As a result, total bank deposit growth inched up from 7.86% to 8% over the same period, primarily due to the jump in FX deposits from 22% in February to 24.7% in March in response to the peso’s devaluation.

 

Rising domestic interest rates have barely induced savings; it is the fall in the peso that has driven increases in FX deposits.

 

So, does this represent confidence in the Philippine economy?

 

The thing is, consumers have been aggressively borrowing from banks and drawing from savings to cover their lifestyle deficit caused by persistent inflation and malinvestments.

 

It is unsurprising that this has limited their purchasing capacity regardless of the actual conditions of the labor market, which authorities have declared to be near full employment.

 

Surveys indicating the rising prevalence of hunger and increased incidences of self-poverty can be explained by this phenomenon.

 

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

 

Moreover, all this occurs even as the government has slowed its deficit spending.

The deficit to GDP ratio dropped to 4.5%—the lowest since Q2 2020. (Figure 4, lowest image)

 

Yes, government spending was subdued in Q1, but that represented direct expenditures. Nonetheless, the government's share of GDP continues to rise, which simultaneously comes at the expense of consumers.

Figure 5

 

The share of Household GDP fell from 75.1% in Q4 2023 (75.3% in Q1 2023) to 74.5% in Q1 2024, while the share of government surged from 11.9% to 14.1% over the same period. (Figure 5, topmost graph)

Q1 2024 GDP reinforced its respective long-term trends.

 

The redistribution effects of deficit spending and malinvestments become increasingly apparent over time.

 

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

 

Like balance sheets, the obverse side of the GDP’s expenditure side is the industry.

 

If exports were booming as so-indicated by the Expenditure GDP, then manufacturing must be outperforming.

 

At 20%, manufacturing has the largest share of the industry GDP, nonetheless, it posted a 4.5% GDP—below the headline GDP, but signified the highest since Q1 2022.

 

Labor retrenchment in parts of the sector and the March plunge in factory data contradicts the PSA’s national accounts data.

 

What sectors boomed in Q1 2024?

 

Financials emerged as one of the fastest-growing sectors, registering a real GDP growth rate of 10%. Notably, the sector's share of the total GDP reached an all-time high of 11.5%, making it the third-largest sector after manufacturing (20%) and retail (16.4%). (Figure 5, middle window)

 

Banks significantly outperformed their non-bank financial counterparts, expanding by 12.7% in Q1 2024 and increasing their share of the industry's pie from 49.3% in Q4 to a historic 61.1% in Q1 2024.

 

The share of banks relative to Total Financial Resources hit the second-highest level of 83.42% last February, indicating the increasing GDP's financialization orfinancialization of the GDP or characterized by intensifying gearing or leveraging.

 

However, despite banks' substantial contribution to the GDP, Q1 2024 profit growth was only 2.95%, marking its lowest level since the pandemic recession in 2020!  (Figure 5, lowest graph)

 

Crucially, profit growth has been on a downward trend since peaking in Q3 2022, largely impacted by sharp declines in non-interest income influenced by rising rates, as well as the decrease in interest income.

 

Rising GDP, falling (inflated) profits while increasing systemic credit risks via massive expansion in leverage.

 

Incredible.

 

Figure 6

 

As a side note, the BSP declared that the country should benefit from the deluge of equity FDI flows for the month of February, which "came from the Netherlands with investments directed mostly to the financial and insurance industry." Equity and investment funds growth rocketed by 480% to USD 830 million, which pushed higher total FDI flows by 29.3% to USD 1.364 billon. (Figure 6, topmost chart)

 

If true, this translates to more players entering a saturated industry. We shall soon see how this impacts the economy.

 

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

 

The construction industry is another sector that outperformed in Q1 2024. Despite its real GDP growing by 7%, its share of the national accounts' pie fell from 7.2% to 6%.

 

Government construction registered the highest GDP growth at 12.4%, marking the third consecutive quarterly decline in growth. Meanwhile, financial and non-financial construction posted a real GDP growth of 6.7%, the highest in the last three quarters, but significantly lower rates than those observed from 2022 through Q2 2023. Government and private sector construction accounted for 26% and 43.4% of the industry, respectively. (Figure 6, middle image)

 

However, the industry's GDP doesn’t reveal the distribution of activities or what percentage are part of Public-Private Partnerships (PPPs).

 

Finally, even with a 2.7% share, accommodation and services posted the fastest GDP in Q1 2024 with 13.9%.  The sector has outperformed its contemporaries in the last four quarters. (Figure 6, lowest window)

 

Nevertheless, based on share of the GDP, the sector has fully recovered from the pandemic recession troughs.

Figure 7

 

The surge in "revenge travel " and staycations has propelled accommodation GDP growth to a brisk 18.4%, compared to food services at 11.9%. Nonetheless, food services retain the largest share of the industry at 68.3%.

 

Although the industry zoomed, during the reopening of the economy, the pace of growth has since diminished.

 

In the face of harried and leveraged domestic consumers, the Department of Tourism data suggests a likely peak in inbound visitors. April arrivals grew by 2.92% year-over-year but shrunk by 9.6% month-over-month (MoM) for the second straight month. (Figure 7, upper graph)

 

While investors pursue recent growth by expanding capacity, industry prospects could be poised for a reversal from the current boom.

 

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

 

How about the trade and the real estate sectors?

 

While consumers struggle, the trade industry GDP improved from 5.2% in Q4 2023 to 6.4% in Q1 2024, its largest since Q1 2023. (Figure 7, lowest chart)

 

Retail GDP substantially improved from 5.7% in Q4 2023 to 7.3% in Q1 2024 while wholesale GDP steadied at 2.3% over the same period.

 

Retail trade accounted for 81.5% of the sector’s GDP, up from 79% in Q4 2023.

 

This divergence suggests that trade investors, like accommodation and food services, have splurged on building capacity, against the backdrop of consumers' diminishing spending capability.

 

The sustained divergence would likely lead to financial pressures on many retail outlets including national retail chains.

 

Financial pressures on the retail segment of SM, an economic titan, showcases this challenge. (SM has yet to report its Q1 17Q)

Figure 8

 

Lastly, the real estate sector, one of the most popular or say the crowd’s favorite, saw its GDP slow considerably from 5.5% in Q4 2023 to 4.1% in Q1 2024. (Figure 8, upper chart)

 

However, its share of the GDP bounced from an all-time low of 5.1% in Q4 2023 to 5.6% in Q1 2024.

 

Despite this, the sector’s share of bank lending continues to mount, it reached 20.7% in Q4 2023 and slipping to 20.6% in Q1 2024.

 

That is to say, while the public have jumped on the bandwagon to chase gains from the industry, often funded by increasing leverage, its contribution to the national economic value continues to decline—a manifestation of malinvestments.

 

Even the mainstream has become aware of the escalating accounts of vacancies, which they see as increasing further due to supply outgrowing demand.

 

While all eyes are on the sector bearing a pipe dream of its revival, oddly, the professional and business services sector has slowly and steadily been outpacing the former. It posted a GDP of 7.5%—its highest rate since Q1 2023.  

 

Interestingly, the sector’s economic contribution—measured by its share of the total—has been steadily outpacing the real estate sector since Q2 2022.  It had a 5.8% share against the 5.6% of the latter in Q1 2024. (Figure 8, lower window)

 

The professional and business services sector encompass various types of services, including legal, photographic, engineering, architectural, veterinary, and all other scientific and technical fields.

 

While many of its services appear to be closely linked with core industry groups, we can infer that its growth contribution arises from a relatively low starting point.

 

Consequently, economic risks may be considerably lower compared to other sectors.

 

So, despite the widespread economic maladjustments, viable opportunities still exist.

 

XI. Summary and Conclusion

 

Q1 2024 GDP retreated and reinforced its second but slower trendline, magnifying the risk of a breakdown.

 

As a result of the peso’s devaluation, net exports contributed most to the Q1 2024 GDP expansion.

 

The risks of violating the downside of the GDP trendline appear supported by the substantial slowing of consumer expenditures, driven by massive bank leveraging and a drain of savings.

 

Furthermore, the "build and they will come" mantra remains a model embraced by popular industries like trade, accommodation and services, and retail, backed by financing from banks, thereby raising systemic risks.

 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels.

___

 

 

References

 

Brandon Smith, Economic Earthquake Ahead? The Cracks Are Spreading Fast, March 7, 2024 Birchgold.com

 

Prudent Investor Newsletter, The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade November 12, 2023

 

Prudent Investor Newsletter, The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy! April 14, 2024