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

 

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

In this issue

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

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

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

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

IV. The USDPHP Cap: A Hidden CPI Subsidy

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

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

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

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

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

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

But is this optimism warranted? 

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

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

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

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

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

Figure 1

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

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

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

But what about its future implications? 

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

As noted in February,  

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

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

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

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

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

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

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

But how true is this?

Figure 2

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

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

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

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

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

Could this signal diminishing returns—mainly from refinancing? 

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

Figure 3

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

And it’s not just inflation. 

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

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

So, where has demand gone? 

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

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

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

Figure 4 

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

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

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

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

IV. The USDPHP Cap: A Hidden CPI Subsidy 

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

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

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

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

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

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

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

Figure 5

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

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

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

Figure 6

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

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

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

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

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

Our bet is on the latter.

___

References  

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

 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

 

Central banks and finance ministries do not hold copper, aluminum, or steel supplies, yet they hold gold. The only explanation for central bank gold hoards is the obvious one - gold is money― James Rickards

In this issue 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

I. BSP’s Contradicting Official Statements

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold?

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? 

The BSP’s gold reserves have been shrinking since 2020, ultimately contributing to the devaluation of the Philippine peso. The BSP sold the most gold in 2024—how low will the peso fall? 

I. BSP’s Contradicting Official Statements 

So, the BSP’s caught up in the wild storm of election season, and guess what? They’re back at it, defending their whole deal with gold reserves. 

BSP, February 24: "The country’s GIR is not used for any other purpose other than meeting the country’s forex requirements. Tasked to manage the country’s external accounts, among other functions, the BSP has been buying and selling gold over the years as part of its core functions. When the BSP sells gold, the proceeds revert to and stay within the GIR. Last year, the GIR rose to USD 106.3 billion from USD 103.8 billion in 2023. Similar to other central banks, the BSP maintains a portion of its reserves in gold as part of the country’s GIR mostly to hedge against/offset movements in the market price of other assets. It buys or sells gold to maintain an optimum level for this purpose, not too much, not too little. This follows basic portfolio-management principles. Gold prices tend to move in the opposite direction of other assets. Therefore central banks hold some gold as a hedge against price declines in other assets in the reserves. However gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." (bold added) 

Back in September, after basking in the limelight, the BSP defended its decision to sell gold.

BSP, September 24, 2024: "The Bangko Sentral ng Pilipinas (BSP) sold gold during the first half of the year as part of its active management strategy of the country’s gold reserves, which form part of the country’s Gross International Reserves (GIR). The BSP took advantage of the higher prices of gold in the market and generated additional income without compromising the primary objectives for holding gold, which are insurance and safety." (bold added) 

There is a stark shift in the BSP’s stance on gold reserves. Earlier, they described gold as essential for "insurance and safety," yet last month they’ve characterized it as a "dead asset" that "earns little interest and has storage costs." 

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

Figure 1

The World Gold Council (WGC) noted that the BSP "confirmed its gold sales—totaling 30 tonnes"—the largest sale by a central bank in 2024. (Figure 1, upper image)

While some other central banks also sold gold, their sales were on a significantly smaller scale.

Globally, central banks were net buyers in 2024, particularly emerging market central banks. The WGC reported that "Central banks added 1,045 tonnes to global gold reserves in 2024."

Since the 2008 financial crisis, global central banks have been rebuilding reserves. (Figure 1, lower pane)

Figure 2

Notably, China’s PBOC and the Central Bank of India were among the most aggressive buyers—not just in 2024, but for several years. (Figure 2, upper window)

Alongside Russia, their gold holdings have matched or even exceeded those of some developed nations, closing the gap with the US. (Figure 2, lower chart—excludes unpublished holdings)

Given this trend, BSP’s claim that "central banks don’t want to hold too much" appears misleading—an appeal to the false majority (argumentum ad populum).

It seems more like an attempt to justify its selling spree rather than reflect actual central bank behavior globally.

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

As part of its "active management strategy," the BSP has been selling gold to finance the USD-PHP soft peg, capping the exchange rate at 59 per USD. This is not just about portfolio rebalancing—it’s a deliberate move to influence the USDPHP exchange rate. 

But that’s not the whole story.

There are costs to this approach. Central banks are political institutions and are not driven by profit-and-loss activities. When the BSP came under scrutiny for its aggressive selling, not only did they stop, but they also started repurchasing gold in August—at much higher prices. In essence, they sold high but bought higher, leading to opportunity losses.

Figure 3

Despite recent incremental purchases, BSP’s gold reserves remain at their lowest level since at least 2019, according to BSP and IMF’s data template on International Reserves and Foreign Currency Liquidity (IRIFCL) data. 

Data further highlights historical trends, including BSP’s two waves of gold sales. (Figure 3, topmost graph) 

First Wave (2020-2021 Pandemic Recession): BSP sold gold even as the USD-PHP was weakening. This suggests it anticipated the pesos’ depreciation. 

Second Wave (Nov 2023 - July 2024): Gold sales preceded another test of the USD-PHP 59 level in June 2024, implying an effort to manage exchange rate volatility. 

Despite record-high gold prices, BSP’s overall reserves increased due to valuation gains rather than inventory growth. (Figure 3, middle diagram) 

In any case, the all-time high in gold prices has led to an increase in gold’s share of the GIR, reaching 2020 levels. (Figure 3, lowest image) 

On the other hand, the BSP’s demonstrated preference for gold sales reveals its dogmatic proclivities, which barely acknowledges gold as a function of ‘insurance and safety.’ 

Still, despite a reduction in inventory, the BSP owes a significant share of its GIR to gold prices. 

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold? 

Figure 4

Beyond public external borrowings, (Figure 4, topmost graph) which bolster the GIR through National Government deposits with the BSP, Other Reserve Assets (ORA) have played a prominent role since 2018. 

ORA has been rising since January 2024, when the BSP accelerated its gold sales. (Figure 4, middle window) 

ORA has played a conspicuous role in the USDPHP. Its surge from 2018 to 2020 coincided with the fall of the USDPHP, and vice versa (Figure 4, lowest chart) 

ORA includes: 

-Mark-to-market financial derivatives (forwards, futures, swaps, options)

-Forwards and options on gold

-Short-term foreign currency loans

-Other financial assets used for immediate liquidity

-Repo assets 

This raises key questions: 

-Has BSP been ‘shorting’ gold via ORA while conducting physical sales to settle delivery? 

-Is BSP boosting its reserves with derivatives and repos via transactions with international financial intermediaries, particularly US-based institutions? 

While the BSP claims that gold "earns little interest and has storage costs," financial derivatives also incur commissions and fees, which are paid to banks, brokers, and dealers. These costs include premiums on options and other transaction fees. 

-Why has the BSP been prioritizing financial derivatives and repos over gold, which serves as "insurance and safety"? Are these instruments not costlier and riskier? 

-Has geopolitics influenced the BSP’s decision-making trade-offs? Aside from its geopolitical alignment with the U.S., could this shift toward Wall Street-linked instruments be connected to the Philippines' removal from the FATF’s money laundering grey list? 

To sum up, has the BSP’s increasing use of financial leverage to sustain the USDPHP soft peg led to diminishing returns? And is its shrinking gold stock a symptom of this trend? 

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt 

Yet more symptoms. 

BSP, February 19: "The country’s overall balance of payments (BOP) position posted a deficit of US$4.1 billion in January 2025, higher than the US$740 million BOP deficit recorded in January 2024. The BOP deficit in January 2025 reflected the Bangko Sentral ng Pilipinas’ (BSP) net foreign exchange operations and drawdowns by the national government (NG) on its foreign currency deposits with the BSP to meet its external debt obligations."

Figure 5

That is, the January BoP deficit widened to an 11-year high! Ironically, the NG raised USD 3.3 billion in January. This suggests that the BOP deficit largely reflects the net cost of defending the USDPHP soft peg. Remarkable!

Additionally, Bureau of Treasury data shows that external debt in peso terms—partially reflecting devaluation—continues to surge, growing 11.4% year-over-year, with its uptrend dating back to 2012

FX debt servicing costs (interest and amortization) skyrocketed 47.5% in 2024, increasing its share of total debt to 22.9%, confirming a trend reversal in 2023.

Be reminded: This debt buildup wouldn’t have been necessary had there been sufficient organic FX revenue (e.g., remittances, tourism, service exports, FDI and etc.).

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

With declining gold reserves and mounting external pressures, peso devaluation appears increasingly likely.

Inquirer.net, February 15: "A peso fall to the 60-level against the US dollar remains “a possibility” despite the Bangko Sentral ng Pilipinas’ (BSP) decision to hold rates steady, Governor Eli Remolona Jr. said, adding that hitting the pause button on easing was the “less disruptive” action for the market." (bold added)

This media communication represents the "signaling channel" approach—where central bankers use public messaging to condition market expectations.

Foreign institutions have begun forecasting a breach of the 59-peso level:

Sunlife: 61

Bank of America: 60

Maybank: 63

BMI: Above 60

HSBC: Beyond 59 

These are hardly typical forecasts or implicit pressure on the BSP; rather, they seem part of the signaling effort in shaping the Overton Window. 

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. 

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s evolving stance on gold raises fundamental questions about its broader strategy. Its aggressive sales, followed by reactive repurchases at higher prices, suggest a focus on short-term currency stabilization—driven by sensationalist politics—rather than strategic reserve management. 

At the same time, the increasing reliance on derivatives and external debt amplifies long-term financial risks. 

Moreover, the BSP appears less committed to defending the 59 level, as indicated by both its rhetoric and evolving fundamentals, including declining gold reserves. 

With external pressures mounting, peso devaluation seems not a matter of IF but WHEN.

 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

  

The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters—Ludwig von Mises 

In this issue

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction

II. January 2025 2.9% CPI: Key Highlights

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

IV. Baseline Changes: Engineering GDP Growth

V. The Falling Rice Prices: Why the Food Emergency Security?

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism

VII. Treasury Markets Are Already Telegraphing Inflation Risk

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices?

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction 

·         January’s CPI provided a temporary breather against the looming risk of an inflation rebound.

·         Despite falling rice prices, authorities pushed forward with a Food Security Emergency—one in a series of interventions aimed at suppressing CPI in the short term.

·         Meanwhile, rising domestic and external debt, coupled with declining foreign reserves (GIR), amplify risks of peso devaluation and feeding the inflation cycle.

II. January 2025 2.9% CPI: Key Highlights 

Businessworld, February 6, 2025: HEADLINE INFLATION remained steady in January as lower utility costs offset a spike in food prices, preliminary data from the Philippine Statistics Authority (PSA) showed. It also settled within the 2.5%-3.3% forecast from the Bangko Sentral ng Pilipinas (BSP). The January print was also slightly higher than the 2.8% median estimate in a BusinessWorld poll of 16 analysts... Core inflation, which discounts volatile prices of food and fuel, settled at 2.6% during the month — slower than 2.8% in December and 3.8% a year ago…On the other hand, rice inflation contracted to 2.3% in January from the 0.8% clip in December and 22.6% jump a year prior. (bold added) 

Nota Bene: As of January, the BSP has yet to release data on bank lending, liquidity conditions, and its central bank survey. This leaves us with the January CPI—interpreted through the lens of what the government intends to highlight: supply-driven inflation!

Figure 1 

Momentum: January’s data suggests stalling momentum in the year-over-year (YoY) change for both headline and core CPI. 

However, a trend analysis of the month-over-month (MoM) change reveals that while headline CPI remains above the upper boundary of its trend line, core CPI remains rangebound, albeit slightly lower than recent highs. (Figure 1, topmost image)

Bottoming Phase? These MoM rates suggest a bottoming phase. It remains uncertain whether this will remain rangebound or break to the upside, requiring further confirmation.

Uptrend of the Third Wave of the Inflation Cycle Intact. Nonetheless, the broader uptrend in the 10-year headline and core CPI remains intact. In fact, MoM trends reinforce the case for a bottoming—a potential launching pad.

It's important to remember that this CPI backdrop occurs amidst the BSP's pursuit of easy money policies since the second half of 2024. This is coupled with a series of all-time highs in bank credit expansion and a near-record unemployment rate in December 2024. (Figure 1, middle and lowest charts)

Figure 2

Level vs. Rate of Change. It is a misimpression to state that January's CPI is at the same level as December's. While the rate of change may be the same, the level is definitively not.

The Philippine Statistics Authority's (PSA) nominal prices determine the level, whereas the CPI figures represent the base-effect represented in percentages. (Figure 2, topmost graph)

The nominal rates also reveal the cumulative effects of the CPI. Even if growth rates stall or decrease (slow), the continued increase in general prices persists.

This leads to sustained hardship, especially for those living on the margins.

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

Authorities often employ self-serving attribution bias—crediting successes to internal factors while attributing failures to external ones—to explain economic phenomena. For instance, they attribute recent food price increases to 'typhoons/weather disturbances' or diseases like African Swine Fever.

The Philippines experiences an average of 20 typhoons annually. If the establishment's logic were consistently true, food prices should be perpetually elevated.

A review of the 10 worst typhoons to hit the country—events that, according to the establishment narrative, should have triggered inflation surges—shows little correlation with CPI spikes. In fact, food CPI exhibited a downtrend in seven of the nine years when these devastating typhoons occurred (the other two took place in 2020). (Figure 2, middle pane)

But, of course, the vulnerable public is expected to accept the official narrative without question—because the echo chamber insists on it!

IV. Baseline Changes: Engineering GDP Growth

Policymakers are always seeking ways to justify their free-lunch economic policies. 

Now, they are signaling a change in the baseline rates of the most sensitive data—particularly the CPI and the GDP—starting in 2026.

Inquirer.net, February 6, 2025: The Philippine Statistics Authority (PSA) will change again the base year used to calculate inflation and gross domestic product (GDP) so that key data could better capture the latest economic conditions.

This adjustment, while technical in nature, conveniently offers a tool for reshaping inflation narratives, making future price pressures appear more benign.

Well, if history serves as a guide, "could better capture the latest economic conditions" often implies adjusting baseline rates to lower the CPI. Comparing the CPI with an overlap of the 2006 and 2018 baselines reveals a significant difference, with the 2018 baseline showing a markedly lower CPI. (Figure 2, lowest diagram)

The BSP still publishes data series from 2000, 2006, 2012, and 2018.

Fundamentally, a high Nominal GDP (NGDP) when calculated against a reduced CPI (as a deflator or implicit price index) results in a HIGHER headline GDP! Voilà! A statistical boom! 

Will the Philippine government achieve its coveted "middle-income status" economy by inflating its statistics? 

V. The Falling Rice Prices: Why the Food Emergency Security?

Authorities also claim that "rice inflation contracted to 2.3% in January from the 0.8% clip in December." 

If this is the case, why the sudden need for a Food Emergency Security (FES) program, which includes light-handed price controls (a maximum Suggested Retail Price) and the release of the National Food Authority’s "buffer rice" or reserves?

Figure 3

If anything, these interventions have temporarily suppressed CPI in the short term. 

In any case, here is a timeline of political interventions in the food and agricultural industry, which should serve as template. 

February 15, 2019: GMA News: Duterte signs rice tariffication bill into law

March 11, 2020: DTI: Nationwide price freeze on basic necessities in effect amid COVID-19 emergency 

February 2, 2021: Inquirer: DA: Price ceiling on pork, chicken products to start on Feb. 8

April 8, 2021: Portcalls: Duterte signs EO lowering tariff for pork imports 

June 1 2024: DTI: DTI secures voluntary price freeze commitments for more basic necessities 

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Figure 3, topmost graph)

Ironically, the easing of interventions may have contributed to the decline in CPI from the end of 2022 to mid-2024. 

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism 

Price ceilings create artificial demand spikes. With buffer stocks being released into the market, their rapid depletion seems inevitable. This means authorities will soon have to replenish reserves—betting that global rice prices remain stable. (Figure 3, middle window)

But even if global rice prices decline, large-scale stockpiling would exacerbate the twin deficits (fiscal and trade deficits). The agricultural sector reported near milestone trade deficit in Q3 2024. (Figure 3, lowest image)

This, in turn, would put additional pressure on the USD-PHP exchange rate, where further peso depreciation would translate into higher import costs, which would help feed into the current inflation cycle.

And now, the Department of Agrarian Reform (DAR) is considering imposing FES on pork prices as well!

It appears authorities believe they can override market dynamics and economic laws through sheer force of policy. But history has shown time and again that such attempts only lead to greater imbalances—necessitating even more interventions in an endless loop of self-inflicted crises.

Good luck to the believers!

VII. Treasury Markets Are Already Telegraphing Inflation Risk

The Philippine Treasury markets are already reflecting this narrative.

Figure 4

The yield curve continues to fall, leading to a bull steepening—a clear signal that the BSP is likely to cut rates. (Figure 4, topmost graph)

While this may provide short-term relief, it also carries risks: looser monetary policy could reignite inflationary pressures while signaling heightened economic uncertainty. 

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices? 

If rice prices are declining and core CPI is slowing, why are authorities aggressively pushing a Food Emergency Security (FES) program? 

The short answer: they want their free lunches to continue. 

Whether through subsidies, price controls, or other interventionist policies, they are ensuring a steady flow of populist measures. 

By the way, the National mid-term Election is in May! 

Importantly, this push signifies a calculated move to secure easier access to cheap credit—leveraging monetary easing to sustain economic illusions. 

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP 

The Bureau of the Treasury (BTr) has yet to release its cash operations report for February 28, limiting our full-year assessment of fiscal health. 

Still, while public debt eased slightly from Php 16.09 trillion in November to Php 16.05 trillion in December, total 2024 public debt closed at an all-time high. 

While the consensus was previously pleased that a slowing deficit had led to a decrease in net debt increases, 2024 experienced "a 9.8% or Php 1.44 trillion increase from the end-2023 level."  (Figure 4, middle chart)

The Bureau of Treasury (BTr) further reported that the "corresponding debt-to-GDP ratio of 60.7% was slightly above the 60.6% revised Medium-Term Fiscal Framework estimate, on account of the lower-than-expected full-year real GDP growth outcome of 5.6%" (Figure 4, lowest diagram)

Yet, this debt increase came despite a supposedly “restrained” deficit—largely due to (potential) record government spending in 2024. 

Put simply, the Php 1.44 trillion debt increase was the trade-off for achieving 5.6% GDP growth. 

There is a cost to everything. 

Yet, the full cost of debt servicing has yet to be published. 

Crucially, this 5.6% GDP growth was artificially fueled by: 

-BSP’s easy money policies,

-Record public spending,

-All-time high public debt,

-Historic bank credit expansion, and

-Near full employment.

Any reversal of these factors—or even a partial pullback—could WIDEN the fiscal deficit to new highs and PUSH debt-to-GDP further upward. 

There is more.

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks

Figure 5

External debt jumped 11.4% in 2024, reaching an all-time high of Php 5.12 trillion. 

Its share of total debt rose for the third consecutive year, now at 31.9%—partly due to peso depreciation but mostly from fresh borrowings totaling Php 401.7 billion. (Figure 5, topmost chart)

Meanwhile, BSP’s January 2025 Gross International Reserves (GIR) shrank by $3.24 billion—its steepest decline since September 2022. This was largely due to their defense of the Philippine peso, even though USD/PHP barely hit 59. (Figure 5, middle pane)

The BSP appears to have adjusted its intervention ceiling or their "upper band" to around 58.7. 

Falling GIR is a price to pay for the USD/PHP peg. (discussed last January)

And remember, 'ample reserves' have barely slowed the USDPHP's juggernaut. (Figure 5, lowest chart)

The BSP also revealed another reason for the GIR decline was a "drawdown on the national government’s (NG) deposits with the BSP to pay off its foreign currency debt obligations." 

Adding another layer of irony, the Philippine government raised $2.25 billion and €1 billion on January 24th. These fresh funds may temporarily boost February’s GIR, reflecting the National Government’s deposits with the BSP. 

Going forward, the government will require even more foreign exchange to service its external debt over time. This suggests continued reliance on foreign borrowing—expanding the BTr’s outstanding FX debt stock and increasing the risk of further peso depreciation. 

With growing dollar scarcity, the BSP’s need to refinance public debt, and the rising FX debt appetite of elite institutions, the government and central bank path-dependence on liquidity injections via easy money and fiscal stimulus have only deepened. 

This, in turn, heightens inflation risks—potentially fueling the third wave of the present inflation cycle. 

Take heed.

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

  

The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it– Strauss & Howe: The Fourth Turning

In this issue

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

III. Asian Currencies in the Shadow of a Strong US Dollar

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

V. The BSP’s Increasing "Borrowed Reserves"

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?"

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

While the local media is abuzz with the worsening standoff in the territorial dispute between the Philippine government and China, and the Philippine Peso nearing record levels, financial experts are oddly silent about the economic risks involved.

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

Figure 1

Mainstream experts seem more confused than ever about the state of the US dollar-Philippine peso $USDPHP. 

As the $USDPHP approaches a milepost, they appear to be sugarcoating the fragility of the Philippine peso by attributing the peso’s weakness to the divergent policy conditions between the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP). (Figure 1, topmost image)

They are actually defending the Philippine peso when they allude to the strength of the US dollar, the elevated Gross International Reserves (GIR), and other possible BSP toolkits. 

Using what seems as reverse psychology, a foreign institution even projected that the peso would "become one of Asia’s worst-performing currencies," given the BSP’s ‘dovish’ stance. (Figure 1, middle visual)

Bizarrely, they placed a marker for this: the USDPHP would "hold at 58 per dollar, although it may weaken to as low as 58.60, which would be a few centavos away from the record-low 59 it hit in 2022." 

Amazing. 

The thing is, the news was hardly a projection; it was a description of present events. 

The USDPHP signified the fourth worst currency in Asia (year-to-date), after the Japanese yen $USDJPY, South Korean won $USDKRW, and Indonesian rupiah $USDINR—as of June 21st. (Figure 1, lowest chart) 

By placing a boundary for the "worst in Asia" assumption to hold, it translates to either a positional stasis or that most Asian currencies would do better because of the so-called ‘dovish’ stance of the BSP. 

Figure 2

Ironically, the nominal yield spread between the 10-year Philippine BVAL and US Treasury bonds has been rising in favor of the former.

Operating under the belief of arbitrage opportunities, the consensus thinks that relatively higher (nominal) rates for the Philippine Treasury should favor the peso.

But this dynamic has barely been the case, as a relatively lower Philippine yield has coincided with a strong peso and vice versa from 2019 to Q1 2022. Since then, USDPHP has climbed ahead despite the spread—or the correlation broke from Q2 2022 to the present. (Figure 2, topmost diagram) 

In brief, this loose correlation does not support the popular thesis.

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

Here is what the Overton Window critically overlooks: the escalating standoff over the territorial dispute between the Philippines and the Chinese government.

Haven't you noticed? The Sino-Philippine West Philippine Sea showdown has been splashed all over mainstream media. Despite this, there is nearly ZERO attribution about it to the Philippine peso or the Philippine economy. This stark contrast underscores the disconnect between the intense diplomatic and military tensions and the lack of insights into its potential economic fallout.

That is to say, while the risks of the Philippines becoming the Ukraine of Asia grows with every confrontation, the consensus oxymoronically sees such risks as non-existent. 

Could they be talking about the Philippines? Why the complete absence of the mounting risks of war?

This seemingly incredible blindness represents either "blissful oblivion" or "willful negligence" over the possible cataclysmic risks from an outbreak of violence. 

As I recently posted on my X (formerly Twitter) account, at the onset of wars, the currencies of those involved—namely the Russian ruble $USDRUB, Ukraine’s hryvnia $USDUAH, and Israel’s new shekel $USDILS—materially fell against the US dollar. (Figure 2, lower image)

That's a blueprint for the Philippine economy that we should expect when water cannons and knives escalate into a shooting battle.

Aside from a possible plunge in the Philippine peso, depending on the scale of war, we can expect a double "deep" recession, a possible stock market crash (if it remains open), rolling brownouts—when power plants become military targets—which means disruptions in digital payments and bank ATM withdrawals, massive disruptions in the division of labor, and the BSP printing more money—which leads to stagflation!

While we earnestly pray that this does not happen, as there are other peaceful options like Vietnam’s "bamboo diplomacy," the Asian version of foreign policy neutrality, it is a risk that every Philippine resident confronts as contending parties to territorial claims remain intransigent and lean on belligerency.

Although we won’t expand further on the geopolitical dimension of the rising risks of a Sino-Philippine military conflict, it's crucial to note that the US dollar-Philippine peso exchange rate is not insulated from these rising tensions. 

My brief two cents on the Philippine government’s turnaround regarding the alleged "armed aggression" of China in an X thread. 

III. Asian Currencies in the Shadow of a Strong US Dollar 

Operating under the de facto US dollar standard, the US and its political, economic, and financial activities overseas have a distinctive impact on the world. 

In addition to the transition away from globalization and domestic politics, geopolitics is another key factor contributing to the recent increasing value of the USD. 

An abrupt rise in the US dollar is often a sign of emerging economic distress.

Figure 3 

Unlike its popular portrayal, the rising value of the USD is not an anomaly. 

Using the US dollar index $DXY as a benchmark, it has been in an uptrend since 2021, supported by a reverse head-and-shoulders pattern. More importantly, the longer-term trend shows a 9-year uptrend. (Figure 3, topmost and second to the highest graphs) 

The $DXY is composed of a weighted basket of developed economy currencies, including the European euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. 

The uptrend in the USD is evident across several ASEAN currencies, including the Indonesian rupiah $USDIDR, the Philippine peso, the Malaysian ringgit $USDMYR, and the Vietnam dong $USDVND, though it's not shown in the chart. (Figure 3, second to the lowest chart) 

In the long term, however, the USD has underperformed against the Thai baht $USDTHB and Singapore dollar $USDSGD. (Figure 3, lowest window)

Using the mainstream's logic, the Bank of Indonesia (BI) unexpectedly raised rates in April in an attempt to "anchor the rupiah". Despite this move, the $USDIDR pair carved out a milestone high last week. Was the BI's decision still "dovish"? 

The essence lies in the fact that Asian currencies exhibit asymmetric performances that are underpinned by their idiosyncratic or unique domestic conditions. 

A sweeping generalization of a strong USD represents a fallacy of composition.

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

Figure 4

More intriguing is the widespread conviction that the country's foreign exchange reserves (GIR) serve as a talisman against the rising US dollar, which appears to be more of a manifestation of faith or defending piety than an analysis based on economic theory and data.

If this belief were valid, then $USDPHP pair would have underperformed. Alternatively, there wouldn’t have been an uptrend in $USDPHP if the GIR had functioned as advertised. (Figure 4, topmost image)

Instead, we see that the GIR fell upon its drawdown by the BSP to defend the peso when the $USDPHP carved a record in 2022.

Ironically, the BSP accelerated its accumulation of GIR in 2019-2020 just at the late stage of the peso's rally.

Since then, it has been a tango for the GIR and USDPHP as both proceeded higher.

Separately, as evident from the BSP's annual balance sheet, the strength of the $USDPHP has coincided with an increasing percentage share of BSP's local currency issuance against its total liabilities. (Figure 4, middle chart)

In short, the primary driver of the USD/PHP's uptrend has been the BSP's money printing operations, not the GIR.

V. The BSP’s Increasing "Borrowed Reserves"

Furthermore, what authorities say is often taken as "gospel truth," with few questioning the numbers behind them.

Let us turn to the GIR. 

The Philippine government borrowed USD 2 billion in early May.

The BSP described the increase in its GIR for the same month as follows: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024) 

Subsequently, the BSP also disclosed that its Balance of Payments (BOP) showed a surplus during the same period: "The BOP surplus in May 2024 reflected inflows arising mainly from the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024)

See that? The BSP admitted that "borrowed reserves" has constituted a part of its GIR and BOP. Hence, the USDPHP ignored them and proceeded higher. (Figure 4, lowest graph)

Figure 5

May’s US dollar borrowings will likely add to the USD 128.7 billion of external debt, which was up by 8.32% in Q1 2024. (Figure 5, topmost graph)

External debt has soared past the BSP’s GIR of USD 104.1 billion for the same period.

Yet, as acknowledged by the BSP, part of external debt has been incorporated into the GIR.

There’s more to consider.

As the Philippines’ April GIR showed, based on IMF’s International Reserves and Foreign Currency Liquidity (IRFCL), the BSP has been selling off its gold reserves and has boosted its use of Other Reserve Assets (ORA).  The BSP’s physical gold reserves last April signified a multi-year low! (Figure 5, middle pane)

Other Reserve Assets comprise financial derivatives, short-term currency loans, repos, and other liquid assets. (IMF, IRFCL)

During the international easy money era, ORA became a feature in the GIR build-up from 2018-2020 and the rally of the peso. (Figure 5, lowest chart)

However, rising costs compelled the BSP to reduce its use in 2022. Nonetheless, the BSP returned to it last April 2024.

The thing is, "borrowed reserves" represent "US dollar shorts," which is attendant with an increasing likelihood of maturity mismatches, especially during times of stress.

Furthermore, "borrowed reserves" will need payment or refinancing. The greater the borrowings, the higher interest payments, refinancing, and principal payments, even in the assumption of steady rates, which translates to increased pressure for organic sourcing of USD revenues.

Otherwise, the economy and government would be forced to continue borrowing externally to meet growing USD liquidity needs, while increasing domestic liquidity, which would amplify the pressure for the Philippine peso to depreciate further. 

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers 

Given the entrenched "trickle-down" political-economic architecture driving the borrowing-to-spend (to prosperity) paradigm, which has engendered a record savings-investment gap, it is difficult to envision a structural shift in the current dynamics—specifically, a transition away from debt dependence—without a disorderly adjustment. 

Underpinned by Keynesian ideology, the establishment has made little or no effort to promote this essential structural change.

Rather than acknowledging the accruing tradeoffs from transitioning to a centralized political economy anchored in fiscal spending (infrastructure and the war economy) and increasing bureaucratization, the consensus continues to promote the illusion of a consumer-driven economy. 

Figure 6

A strengthening economy would swell trade deficits, given the structural shortcomings in local production, while an acceleration of the fiscal deficit would magnify the credit-financed "twin deficits." 

As evidence, April’s trade deficit expanded as imports grew by 12.6%, driven by increases in capital imports (+10.5%) and consumer goods (+15.7%). (Figure 6, top, middle and lowest chart) 

Therefore, authorities would need to rely on remittances, tourism, service exports, FDIs, foreign portfolio flows, or borrowings to cover the FX deficits.

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

Figure 7

Despite record-high nominal Overseas Filipino Workers (OFW) remittances last April, their growth rate has been slowing down primarily due to base effects.

Moreover, remittance flows are heavily influenced by global economic conditions, which may face hurdles from increasing barriers to social mobility. For instance, rising economic barriers and increased nationalism are expected to slow OFW flows.

On the other hand, vigorous tourism growth in 2023, fueled by strong domestic "revenge travel" and improved foreign arrivals, appears to have cooled down in 2024.

While FDI flows seem to be improving, the majority of these flows consist of debt. Reported FDI flows were up 23% last March and 42% in the first quarter, with debt accounting for 68% and 62% of the share, respectively.

Intercompany debt infusions do not guarantee genuine investments. Instead, they expand the USD shorts.

Additionally, taking sides in the geopolitical hegemonic contest could deter investors, making politics rather than markets the determinant of investment flows.

Meanwhile, volatile flows from foreign portfolio exposure cannot be relied upon to boost demand for the peso. This is primarily due to the structural inadequacy of the capital markets' depth (PSE and the fixed income market), which remain dominated by the elites.

Another fundamental reason is that portfolio flows are heavily dependent on global risk conditions.

Lastly, services exports appear to be the remaining hope to cushion the peso via USD revenues. So far, the industry is said to be on track to meet its growth targets this year.

However, any slowdown in this sector would exacerbate USD funding pressures.

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?" 

It is clear that the USDPHP has not been primarily driven by BSP-FED policy divergence but by real economic factors, including the BSP’s domestic monetary operations. 

If the current arrangements have resulted in thin buffers, imagine what an outbreak of military conflict would do. 

The striking divergence between a war-hawkish leaning public and the absence of discussion about its risks in the domestic financial sphere reminds me of the glaring disparity in the fact-finding report by two of former US President John F. Kennedy's foreign policy advisors, Victor Krulak and Joseph Mendenhall, on Vietnam. President Kennedy reportedly asked both, "You two did visit the same country, didn't you?" 

Paraphrasing Kennedy and alluding to local media and domestic financial experts, "You two are discussing the same country, aren't you?"

_____

References: 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion June 7, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, BOP Posts US$2.0 Billion Surplus in May 2024; End-May GIR Rises to US$105.0 Billion June 19, 2024 bsp.gov.ph

International Monetary Fund, INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE, p.25 imf.org