If the governments devalue the currency in order to betray all creditors, you politely call this procedure 'inflation'--George Bernard Shaw
In this issue
Why the Philippine Peso's
Strength Masks Underlying Vulnerabilities
I. Philippine Peso in the
Face of a Weak Dollar
II. Is the Peso’s Strength
Rooted in Fundamentals? Portfolio Flows: A Mixed Picture
III. Remittances:
Diminishing Returns
IV. Tourism: Geopolitical
Headwinds
V. Trade Data: Structural
Deficiencies Revealed
VI. Balance of Payments
and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)
VII. BSP’s Tightening Grip
on FX Markets and the Illusion of Stability
VIII. The Speculative Role
of the BSP: Other Reserve Assets
IX. Rising External Debt:
A Ticking Time Bomb
X. Conclusion: Transitory Strength, Structural Fragility
Why the Philippine Peso's Strength Masks Underlying Vulnerabilities
A strong Philippine peso hides the cracks of FX debt, deficits, and interventions.
I. Philippine Peso in the Face of a Weak Dollar
Figure 1
Surprisingly, the Philippine peso has outperformed its regional peers. Year-to-date, the USD-Philippine peso USDPHP has declined by 2.73% as of April 25. (Figure 1, upper window)
Despite a generally weak dollar environment, the greenback has risen against some ASEAN currencies: it has appreciated by 4.32% against the Indonesian rupiah (IDR) according to Bloomberg data, and by 2.2% against the Vietnamese dong (VND) based on TradingEconomics data, year-to-date.
The USDPHP’s behavior has largely mirrored the oscillations of the USD-euro $USDEUR pair and the Dollar Index $DXY, both of which have declined by -9.5% and -9% YTD, respectively. The euro commands the largest weight in the DXY basket at 57.6%, amplifying its influence over the index's performance. (Figure 1, lower image)
II. Is the Peso’s Strength Rooted in Fundamentals? Portfolio Flows: A Mixed Picture
Figure 2
Foreign portfolio flows have been volatile.
The first two months of 2025 recorded a modest net inflow of USD 176.6 million, following significant outflows of USD 283.7 million in January and inflows of USD 460.34 million in February. These inflows were mainly directed towards government securities (USD 366 million), while the Philippine Stock Exchange (PSE) suffered USD 189 million in outflows. (Figure 2 topmost graph)
In 2024, Philippine capital markets saw foreign portfolio inflows of USD 2.1 billion—the largest since 2013—suggesting a temporary vote of confidence, albeit in a risk-on environment favoring emerging markets more broadly.
Meanwhile, the Bangko Sentral ng Pilipinas (BSP) reported that foreign direct investment (FDI) flows fell 20% year-on-year to USD 731 million in January 2025 from USD 914 million the year prior. (Figure 2, middle chart)
Still, 71% of January’s FDI consisted of debt inflows, rather than equity investments.
Ironically, despite the administration's aggressive international junkets (2022-2024) aimed at wooing investors through geopolitical alliances, these efforts have borne little fruit.
What happened?
As previously noted, an overvalued peso—maintained by a de facto USDPHP soft peg—along with high "hurdle rates" stemming from bureaucratic red tape and regulatory barriers, and the implicit consequences of "trickle-down" easy money policies benefiting the government and their elites (i.e., crony capitalism), have collectively undermined Philippine competitiveness.
III. Remittances: Diminishing Returns
Overseas Filipino Worker (OFW) remittance flows continue to grow, but at a marginal and slowing pace. Personal remittances rose 2.6% in February, with cumulative year-to-date growth at 2.7%. (Figure 2, lowest visual)
However, the long-term trend in remittance growth has been declining since its 2013 peak—a period that coincided with the secular bottoming of the USDPHP.
This trend reflects the diminishing marginal impact of remittances on the peso’s valuation.
In short, remittances are becoming less material in influencing the peso’s foreign exchange rate.
A more sustainable strategy would be to foster structurally inclusive economic growth—creating more high-quality domestic jobs and raising incomes—to reduce the country’s dependence on labor exportation and mitigate brain drain.
Sadly, the slowdown in remittance growth does not point toward such an outcome.
IV. Tourism:
Geopolitical Headwinds
Figure 3
The Philippine tourism sector's recovery may have stumbled.
Foreign tourist arrivals fell by 2.42% in Q1 2025, while total arrivals—including overseas Filipino visitors—dropped by 0.51%. This was largely driven by a staggering 28.8% collapse in Chinese tourist arrivals in March and a 33.7% year-on-year plunge in Q1. This slump mirrors the escalating geopolitical tensions between the Philippines and China, particularly as Manila increasingly aligns itself with U.S. strategic interests. (Figure 3, upper diagram)
Interestingly, American tourist arrivals also fell by 0.7% in March, although they rose by 7.9% for Q1 overall. Nonetheless, the growth in American tourists has hardly offset the sharp loss of Chinese visitors. (Figure 3, lower chart)
In effect, a ‘war economy’ reduces the Philippines’ attractiveness as a tourism and investment destination.
V. Trade Data: Structural Deficiencies Revealed
Figure 4
The Philippines' trade deficit narrowed by 11.44% to USD 3.16 billion in February, owing to a 1.8% contraction in imports and a muted 3.94% increase in exports, year-on-year. (Figure 4, upper graph)
While many mainstream talking heads argue that tariff liberalization will eventually benefit the Philippines, external trade figures tell a different story—one marred by structural weaknesses: high energy costs, a persistent credit financed savings-investment gap (a byproduct of trickle-down policies), the USDPHP peg, human capital limitations, economic centralization, regulatory hurdles and more.
Since 2013, total external trade (imports + exports) has grown at a CAGR of 4.84%—driven by imports growing at 5.95%, compared to exports at only 3.42%. Adjusted for currency movement (with the USDPHP CAGR at 3.01%), this yields a real export CAGR of just 0.41% versus 2.85% for imports, implying a real external trade CAGR of only 1.77%. (Figure 4 lower image)
While rising imports may superficially suggest robust consumption, a deeper question emerges: Is consumption fueled by genuine productivity gains—or by unsustainable credit expansion?
Ultimately, the data show that import-driven consumption has widened the trade deficit, and that local manufacturing remains largely uncompetitive relative to regional peers.
Against this backdrop, how realistic is it to expect that Trump's proposed tariffs will magically turn the Philippines into an export hub?
VI. Balance of Payments
and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)
Figure 5
The BSP reported a Balance of Payments (BoP) deficit of USD 2 billion for March 2025, following a staggering USD 4.1 billion deficit in January—an 11-year high—and a temporary surplus of USD 3.1 billion in February. The Q1 2025 BoP deficit stood at USD 2.96 billion. (Figure 5, upper window)
The BSP attributed these outflows to "drawdowns on reserves to meet external debt obligations" and to fund foreign exchange operations—justifications previously offered for January’s record deficit.
Meanwhile, February’s surplus largely stemmed from net foreign currency deposits by the National Government, sourced from proceeds of ROP Global Bond issuances and income from BSP’s foreign investments—in other words, from external borrowings.
Notably, the BSP has admitted that the year-to-date BoP deficit mainly reflects the widening goods trade deficit. Either this conflicts with PSA trade data showing a narrowing February deficit, or it hints at a possible sharp deterioration in March's trade balance.
Regardless, the BoP reports clearly indicate heavy BSP intervention in the FX market, even though the USDPHP remains well below the 59-level psychological ceiling.
Consequently, the BSP’s gross international reserves (GIR) dropped from USD 107.4 billion in February to USD 106.7 billion in March—a USD 725 million decline. (Figure 5, lower diagram)
Importantly, much of the GIR’s support comes from the government’s external borrowings deposited with the BSP. Thus, the GIR has been padded up artificially.
Figure 6
Even more striking: gold’s record high prices have prevented a steeper GIR decline, despite the BSP selling small amounts of gold in February.
Gold's share of GIR slipped marginally from 11.4% in February to 11.22% in March. (Figure 6, upper pane)
Had it not been for ATH (all-time high) gold prices, the GIR would have deteriorated more significantly.
As previously explained, as with the 2020 episode, sharply falling gold inventories preceded the devaluation of the peso. (Figure 6, lower chart)
Outside of gold, a large share of GIR now constitutes "borrowed reserves"—a growing vulnerability tied directly to the BSP’s soft peg strategy for the USDPHP.
This suggests that the recent GIR stability could be masking underlying vulnerabilities.
VII. BSP’s Tightening Grip on FX Markets and the Illusion of Stability
It is therefore almost amusing to encounter this news item, based on the BSP’s publication:
Inquirer.net, April 24: "The Bangko Sentral ng Pilipinas (BSP) tightened regulations on foreign exchange (FX) derivatives involving the Philippine peso to ensure these are not used for currency speculation. Circular No. 1212, signed by Governor Eli Remolona Jr., mandates that banks authorized to transact in non-deliverable FX derivatives must ensure these are used for legitimate economic purposes."
But who are the likely participants in FX swaps, non-deliverable forwards, and FX derivatives?
Not me. Not the general public.
Given that PSE participation is only around 1% of the total population (as of 2023), the obvious answer is: banks and their elite clientele—the BSP’s own cartel members.
Thus, what is the real message behind this announcement?
First, banks and their elite clients may have been positioning against the peso, in ways inconsistent with BSP policy—prompting the BSP to tighten currency controls.
Second, the BSP wants to show the public it is taking action, even as real risks accumulate.
Third, something is amiss if the BSP feels compelled to impose tighter controls even with the USDPHP hovering at 56—well away from their upper band limit.
Ultimately, who is truly engaged in currency speculation here?
VIII. The Speculative
Role of the BSP: Other Reserve Assets
Figure 7
Since 2018, the BSP has increasingly used Other Reserve Assets (ORA) to manage its GIR. (Figure 7)
According to IMF IRFCL guidelines, ORA includes:
-Net, marked-to-market value of
financial derivatives (forwards, futures, swaps, options)
-Short-term foreign currency
loans
-Long-term loans to IMF trust
accounts
-Other liquid foreign currency
financial assets
-Repo assets
The BSP’s ORA surged by 210.3% in February, lifting its share of GIR to 9.18%. Yet, even this rise was overshadowed by gold's role in preserving GIR totals.
In truth, the BSP itself is a speculator—aggressively managing USDPHP levels against market forces.
In pursuing short-term stability, it risks building imbalances that will eventually unwind with greater force.
This has been evident in the widening BoP deficit, the rising share of "borrowed reserves," and the sustained gold sales.
IX. Rising External
Debt: A Ticking Time Bomb
Figure 8
Perhaps most revealing is this BSP announcement:
BSP, April 25, 2025: "The Monetary Board approved USD 6.29 billion worth of proposed public sector foreign borrowings in Q1 2025, up by 118.91% from USD 2.87 billion during the same period last year." (bold mine) [figure 8, upper graph]
Whatever the justification—whether for infrastructure, green (climate), defense, or welfare or others—debt is debt.
Even though the BSP paid down nearly half its obligations (posting a Q1 BoP deficit of USD 2.96 billion), the residual balance should add to the swelling external debt stock. (Figure 8, lower chart)
Recall that as of Q4 2024, government debt already accounted for 58% of total external debt. Banks and non-finance institutions are likely to add to this pile.
Higher public debt implies higher future debt servicing costs, crowding out resources from productive investments, draining savings, increasing leverage, and deepening the Philippines’ dependence on foreign financing.
X. Conclusion: Transitory Strength, Structural Fragility
The Philippine peso’s strength in 2025, buoyed by a weak U.S. dollar, masks underlying vulnerabilities. Structural issues—overvalued currency, uncompetitive manufacturing, declining remittance growth, geopolitical strains, and reliance on borrowed reserves—undermine long-term stability.
Through the USDPHP soft peg, the BSP’s interventions, while stabilizing the peso in the short term, foster imbalances that could unravel with a global tightening of monetary conditions.
Without addressing these structural challenges through inclusive growth, deregulation, and reduced dependence on debt and remittances, the Philippines risks a rude awakening. The peso’s current resilience is less a reflection of economic strength and more a temporary reprieve, vulnerable to shifts in global financial tides.
Nota bene: Although we discussed tourism and remittances, we did not cover business process outsourcing (BPO) and other export services in depth, largely due to limited data and the need to rely on GDP proxies. Regardless, surging debt levels are exposing widening FX liquidity vulnerabilities that services alone cannot offset.
____
reference
IMF INTERNATIONAL
RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE 2.
OFFICIAL RESERVE ASSETS AND OTHER FOREIGN CURRENCY ASSETS (APPROXIMATE MARKET
VALUE): SECTION I OF THE RESERVES DATA TEMPLATE, p.25 IMF.org
