USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

 

The pretended solicitude for the nation’s welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money—Ludwig von Mises

In this issue:

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility

II. Strong US Dollar Narrative Debunked

III. BSP’s Easing Cycle, Data vs. Narrative

IV. Cui Bono? (Redux)

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables

VII. Averch–Johnson Trap and Public Choice Theory in Action

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets

IX. Bank Liquidity Strains Beneath the Surface

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

XI. Keynesian Malinvestment and Policy Distortions

XII. AFS Losses and HTM Fragility

XIII. Banks Compound the Crowding Out Dynamics

XIV. The Biggest Borrower Is the State

XV. Public Revenues Are Collapsing

XVI. A Budget as Bailout

XVII. The Sovereign–FX–Savings Doom Loop

VIII. Conclusion: The Real Story: Bailouts Everywhere

XIX. Encore: From “Manageable Deficit” to Crisis Trigger 

Notice: This will likely be my last post of 2025 unless something interesting comes up. Have a safe, relaxing, and enjoyable holiday season! 🎄🎅

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress 

From peso weakness to systemic unraveling: energy and fiscal bailouts, malinvestment, and the illusion of stability. 

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility 

On December 9, the USDPHP surged to a new record high—its third all-time highs since crossing the BSP’s 59-level “Maginot Line” on October 28. Yet despite the historic print, the pair has traded within an unusually narrow range—depicting active BSP intervention to suppress volatility 

This suppression of volatility has continued to date, with USDPHP retreating to the 58 level. The pair closed at 58.7 on December 19, roughly 0.9% below the record high of 59.22. 

Media outlets swiftly attributed the move to expectations of a BSP rate cut. Others defaulted to the familiar refrain of a “strong dollar.” 

II. Strong US Dollar Narrative Debunked 

Let us address the latter first. 

On the day the peso set a new record low, the US dollar weakened against 24 of the 28 currency pairs tracked by Exante Data. The Philippine peso stood out as one of only four Asian outliers—during a week when Asian FX broadly strengthened.

Figure 1

Moreover, the USDPHP has been on a steady ascent since May 2025, while the dollar index (DXY) peaked in September and has since shown signs of exhaustion. There is zero empirical basis to attribute this peso collapse to dollar strength. (Figure 1, topmost pane) 

But attribution often follows convenience—particularly when political patrons prefer comforting narratives. 

III. BSP’s Easing Cycle, Data vs. Narrative 

Now back to the first premise: interest rates as tinder to the USDPHP fire. 

Two days after the peso hit its latest record, the BSP announced its fifth policy rate cut of 2025 on December 11, the eighth since the easing cycle began in August 2024. This was accompanied by two reserve requirement (RRR) cuts—in September 2024 and March 2025—the latter bundled with a doubling of deposit insurance coverage. 

Why this aggressive easing? 

Like a religious incantation, the establishment rationalized BSP’s actions as growth stimulus. As the Inquirer noted, the BSP acted "as concerns about weakening economic growth outweighed the risks of peso depreciation." 

The BSP claims data-dependence. But has it examined its own history? 

Instead of catalyzing growth, repeated easing cycles have coincided with GDP deceleration— from 2012–2019, and again during the post-pandemic banking system rescue from Q2 2021 onward, even after interim rate hikes. (Figure 1, middle window) 

The much-cited “flood control” episode only emerged in Q3 2025, long after the damage was done. 

So the question remains: cui bono? 

IV. Cui Bono? (Redux) 

Certainly not MSMEs. 

The beneficiaries are balance-sheet-heavy incumbents with preferential access to credit, regulatory relief, and FX protection. 

Bank compliance rates for MSME lending fell to historic lows in Q3 2025 as headline GDP slowed to pandemic levels. (Figure 1, lowest chart) 

The post–Global Financial Crisis easing playbook produced the same result: banks found it cheaper to pay penalties than lend to MSMEs. 

Most tellingly, the BSP removed the MSME lending compliance data from its website last week. 

And why now?

Because the data exposes the failure of both the Magna Carta for MSMEs and the BSP’s easing doctrine: liquidity was created, but it never reached the productive economy—the transmission channel broke down. 

This is not a failure of transparency. 

The peso is not reacting to rate cuts as stimulus. It is repricing a regime in which monetary easing now functions as fiscal accommodation and elite stabilization—diverting and diminishing productive credit. 

Removing an indicator does not eliminate the risk factor—it merely eliminates early-warning signaling 

And elite debt is one of the central forces driving this policy response. 

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal 

As we have previously noted: “In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022.” (see reference, PSEi 30 Q3 and 9M 2025 Performance, November) 

And that’s just the PSEi 30. 

Financial fragility has intensified to the point that authorities have begun instituting explicit and implicit bailout measures. 

The regulatory relief via the suspension and forgiveness of real property taxes (RPTs) for independent power producers (IPPs) provided circumstantial—but powerful—evidence that the SMC–AEV–Meralco triangle was not an isolated deal, but part of a phased continuum: transactional camouflage, regulatory condonation, financial backstopping—ultimately leading to either socialization or forced liberalization. (see reference, Oligarchic Bailout—December) 

Crucially, the asset-transfer phenomenon in the energy sector is not confined to the SMC–AEV–MER axis. (see reference Inside the SMC–Meralco–AEV Energy Deal—November) 

Prime Infrastructure, controlled by tycoon Enrique Razon, acquired 60% of Lopez owned First Gen’s Batangas assets for Php50 billion. This occurred alongside broader liquidity-raising measures by the Lopez Group, including the sale of roughly 30,000 square meters of its ABS-CBN headquarters in Quezon City for Php 6.24 billion, and the termination of the ABS-CBN–TV5 partnership due to financial disagreements. 

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables 

At the same time, regulatory support has extended beyond asset transfers. 

The Energy Regulatory Commission (ERC) approved the collection of the Green Energy Auction Allowance (GEA-All) on top of the existing Feed-in Tariff Allowance (FIT-All), explicitly allowing renewable developers to recover costs directly from consumers. These mechanisms institutionalize tariff pass-throughs as balance-sheet support.

Figure 2

Aggregate data underscore the scale of the problem. As of 9M 2025, the combined debt of major listed renewable firms—AP, ACEN, FGEN, CREC, SPNEC, and ALTER—surged from Php Php490.1 billion in 2024 to Php 682.2 billion in 2025, a 39.2% increase! (Figure 2, topmost table) 

The sharpest percentage increases came from SPNEC, ALTER, and CREC. 

Taken together, debt is the common thread now binding the Philippine energy sector’s restructuring. 

Beyond the SMC–AEV–Meralco triangle, leverage stress is visible across ownership groups. First Gen’s heavy debt load, the Lopez Group’s asset disposals, and Prime Infrastructure’s acquisition of operating assets all point to balance-sheet defense rather than expansion. These are not growth reallocations but late-cycle capital triage. 

The Prime Infra–First Gen transaction fits the same pattern seen elsewhere: risk is being relocated, not resolved. Mature energy assets migrate toward entities best positioned to manage regulatory and political risk, while leverage remains embedded in the system. Market discipline is deferred, price discovery suppressed, and time is bought—without reducing aggregate debt exposure and systemic malinvestments

These are not M&A events. These are distressed-asset reallocations under sovereign protection. 

Renewables exhibit the same logic through a different channel. 

VII. Averch–Johnson Trap and Public Choice Theory in Action 

Under FIT-All and GEA-All, tariff pass-throughs convert private leverage into consumer-backed cash flows. 

This is the Averch–Johnson trap in practice: capital intensity and debt are rewarded, inefficiency is preserved, and default risk is implicitly backstopped—reaffirming public choice theory in action: concentrated benefits, dispersed costs; privatized gains, socialized losses. 

Firms such as SPGEN, ALTER, and ACEN are not anomalies. They are rational actors responding to a regulatory regime that socializes balance-sheet stress through electricity prices. 

All these said, asset transfers in conventional power and tariff-embedded support for renewables show that the sector is no longer allocating capital for efficiency or growth. It is preserving leverage. Whether through strategic transactions or regulatory pass-throughs, losses are being deferred and dispersed—into consumers, banks, and ultimately the sovereign—confirming that the energy sector has entered a late-cycle rescue phase rather than a genuine transition. 

In the Philippines, ESG is not a financing premium—it has become a political guarantee of revenue recovery. 

In essence, these bailouts are not energy policy. They are rent-seeking protectionism.  

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets 

But elite debt isn’t the only problem. 

For every borrower is a creditor—a counterparty. And banks are heavily exposed. 

Total financial resources (TFR) rose 6.76% to Php 35.311 trillion, with bank assets expanding faster at 7.2% to Php29.21 trillion last October. (Figure 2, middle image) 

Both sit at the second-highest nominal levels on record. Banks now hold 82.74% of TFR, and universal/commercial banks (UCs) account for 76.8% of that. UC banks make up 92.87% of total bank assets. 

The Bank-UC share of TFR has risen steadily since 2007—and the pandemic recession accelerated that centralization trend. 

Fundamentally, bank centralization of financial assets means:

• They dominate credit allocation and distribution.
• They generate and circulate most liquidity and money supply.
• In a low-volume, savings-deprived system, they are the dominant players in capital markets (stocks and bonds).
• They command the financial-intermediation process. 

A BSP-driven concentration of financial assets therefore escalates concentration risk. Yet almost no mainstream analysts address this. 

IX. Bank Liquidity Strains Beneath the Surface 

Even less is said about the intensifying liquidity strains in the banking system. 

Despite supposedly “manageable” NPLs, banks’ cash-to-deposit ratio hit all-time lows last October. Liquid assets-to-deposits plunged to 47.44%— a level last seen during the March 2020 pandemic outbreak—essentially erasing the BSP’s historic Php 2.3 trillion liquidity injection. (Figure 2, lowest graph) 

This signals that tightening bank cash reserves mirrors tightening corporate liquidity. 

And the pressures are not just from the elite portfolios—they span bank operating structure. 

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

Figure 3

NPL ratios have been propped up by a Wile E. Coyote velocity race: NPLs are near all-time highs, but their growth is masked by faster loan expansion. The 3.33% gross NPL ratio in October reflects gross NPL growth of 2.43% YoY versus 10.7% TLP growth. As long as credit velocity outruns impairment, the illusion of stability persists. (Figure 3, topmost visual) 

Yet NPLs also remain strangely “stable” even as GDP momentum breaks and unemployment rises—an inversion of normal credit dynamics. In a normal cycle, deteriorating growth and labor markets should push impairments higher; the fact that they don’t suggests suppression, rollover refinancing, and delayed recognition rather than genuine asset quality. 

Consumer credit cards illustrate the spiral—receivables at Php 1.094 trillion, NPLs at Php 52.72 billion, both at record highs. (Figure 3, middle diagram) 

Since 2020, the BSP’s rate cap and the recession pushed banks toward a consumer-credit model—where consumer credit growth now outpaces production loans. That dynamic amplifies inflation: too much money chasing too few goods. 

The consumer-loan share of UC lending (ex-real estate) hit a record 13.73% in October, while production loans fell to 86.27%—an all-time low. (Figure 3, lowest chart) 

XI. Keynesian Malinvestment and Policy Distortions 

This reflects Keynesian stimulus ideology—the belief that consumers can borrow and spend their way to prosperity. Its Achilles heel is the disregard for balance sheets and malinvestment risks. 

Banks have now wagered not only on elites but a widening consumer base—including subprime borrowers. And because participation in consumer credit remains limited, concentration keeps rising. 

Pandemic-era regulatory relief still suppresses benchmark NPL recognition.

XII. AFS Losses and HTM Fragility 

Simultaneously, banks accelerated balance-sheet leverage through Available-for-Sale (AFS) assets—another velocity game.

Figure 4

Losses in financial assets have slowed earnings. AFS exposure surged from 3Q 2023 to today, closing the gap with Held-to-Maturity (HTM). As of October, AFS and HTM made up 41.04% and 51.21% of financial assets, respectively. (Figure 4, topmost diagram) 

Financial-asset losses climbed from Php 16.94 B (1Q 2023) to Php 41.45 B (3Q 2025), which capped profit growth—banks earned just 2.5% more in 3Q 2025. (Figure 4, middle image) 

HTMs act as hidden NPLs and suppressed mark-to-market losses, worsening liquidity drought. Cash ratios peaked in 2013 and have declined ever since—mirroring the rise of HTM.

It’s no coincidence that record-high HTMs accompany the surge in banks’ net claims on central government (NCoCG). In October, NCoCG hit Php5.663 T (2nd-highest on record), and HTMs reached Php4.022 T (also near a record). (Figure 4, lowest graphs) 

Siloed government securities—rationalized under "Basel compliance"—combined with NPL overhang (consumer and likely under-reported production) and asset losses help explain slowing deposit growth. 

Velocity masking is inherently pro-cyclical. When velocity slows, NPL truth appears—all at once 

XIII. Banks Compound the Crowding Out Dynamics 

Banks are now forced to compete with elites and the government for scarce household savings.

Figure 5

Bank bonds and bills payable stood at Php1. 548 trillion in October 2025, down 3.44% YoY but still hovering near record highs. (Figure 5, topmost pane) 

To meet FX requirements and even assist the BSP in propping up Gross International Reserves (GIR), banks have increasingly tapped global capital markets. BSP data show the banking system’s external debt rose 0.3% to $28.97 billion in Q3 2025—its third‑highest level. BDO itself raised US$500 million through five‑year fixed‑rate senior notes in November 2025. (Figure 5, middle graph) 

Meanwhile, BSP’s Net Foreign Assets climbed 2.12% YoY, driven by a 26.3% surge in Other Deposits Corporation (ODC) FX assets—a growth spiral over the last three months that underscores a rapid FX-liquidity build-up outside deposit funding and a scramble for offshore liquidity. 

When banks become the transmission channel for fiscal deficits, corporate rescues, consumer support, and green‑subsidy pipelines, the endgame isn’t stability—it is deposit fragility, duration risk (asset‑liability mismatch), and the erosion of market discipline. These are the seeds of a balance sheet crisis, with BSP backstops looming ominously over a weak peso. 

XIV. The Biggest Borrower Is the State 

The biggest borrowers are not only the elites and the banks—the government itself stands at the center. 

Last September, the Bureau of Treasury signaled that public debt would ease toward year-end through scheduled amortizations and a slowdown in issuance. 

We warned that without genuine spending restraint; any dip would be a temporary statistical blip. 

And so it was. After two months of declines, public debt surged 9.6% YoY to Php 17.562 trillion in October—just Php1 billion shy of July’s record Php17.563 trillion. Local borrowings climbed 10.6%, outpacing external debt growth of 7.53%. 

Why would debt slow when deficit spending remains unchecked? 

XV. Public Revenues Are Collapsing 

Authorities and media largely ignored the mechanics behind October’s seasonal surplus (Php 11.154 billion), driven by a reporting artifact (the shift from monthly to quarterly VAT). 

They fixated on the headline numbers: a spending dip linked to the flood-control scandal, and 6.64% shrinkage in collections. 

The bigger picture was ignored: BIR’s 1.02% growth was its weakest since December 2023; Bureau of Customs fell 4.5%; non‑tax revenues collapsed 53.3% 

The 10-month numbers confirm structural decay: revenue growth slid to 1.13%, the weakest since 2020. Tax revenue growth of 7.45% is also at post-pandemic lows. BIR’s 9.6% is a four-year trough; BoC’s 0.9% has drifted toward contraction; non-tax revenues collapsed 36.7%—the weakest since at least 2009. 

A narrow decline in the fiscal deficit (Php1.106 trillion—third-largest on record) provides no comfort. With two months remaining, the deficit can surpass 2022’s Php1.112 trillion and approach 2021’s Php1.203 trillion—entirely dependent on tax performance. (Figure 5, lowest visual) 

Since GDP drives revenues, these numbers reaffirm the dynamic: slowing growth, rising unemployment, yet oddly “stable” NPLs—a contradiction sustained by velocity illusions. 

Expenditure growth may remain muted by political scandal, but revenue weakness is decisive. 

XVI. Debt and Debt Servicing Is Crowding Out Everything Else 

Record public debt now drives record servicing. As of October, Php1.935 trillion in debt payments has nearly breached the Php2.02-trillion 2024 record—a gap of barely 4.3% with two months to go. 

The identity is mechanical: (as discussed last August, see reference)

• More debt → more servicing → less for everything else
• Public and private spending are crowded out
• Revenue cannot keep pace with amortization
• FX depreciation and inflation risks accelerate
• Higher taxes become inevitable

This process is becoming more apparent by the month. 

XVI. A Budget as Bailout 

Yet ideology prevails. Despite weakening revenues and slowing nominal GDP, Congress has passed a record Php 6.793‑trillion 2026 budget. 

Figure 6 

The headline implies “just” a 7.4% increase from 2025, but because spending targets for 2025 were revised downward, the 2026 expansion is far larger once fully implemented. (Figure 6, topmost window) 

The cut to DPWH—politically expedient after a corruption uproar—was simply reallocated to entities like PhilHealth. No discipline, just reshuffling. 

Record spending in the face of a deteriorating economy is not stimulus—it is a fiscal bailout in progress. 

XVII. The Sovereign–FX–Savings Doom Loop 

An economy with an extreme savings-investment gap and a quasi-‘soft peg’ to the USD must fund deficits externally. Public sector foreign debt reached USD 90.6 billion in Q3—up 11.7% YoY, with a record 61% share of the total. (Figure 6, middle image) 

Every peso the state cannot fund through revenue must be sourced from bank balance sheets—through deposits, government securities, or offshore borrowing. The sovereign becomes a debtor to the banking system, and the banks become debtors to households. That is the sovereign–bank–household doom loop. 

This external financing occurs despite a stretched fiscal capacity: the Q3 deficit-to-GDP ratio of 6.63% was the fourth-widest on record, achieved at the expense of households via  intensifying financial repression and crowding-out. (Figure 6, lowest chart) 

Despite mainstream optimism about “manageable” fiscal health, current dynamics risk unraveling into fiscal shock. 

Monetary loosening—locally and globally—is masking fragility. When that cover fades, the peso absorbs the shock. 

VIII. Conclusion: The Real Story: Bailouts Everywhere 

While the public fixates on the corruption scandal, bailouts continue in real time—implicit and explicit, fiscal and regulatory. 

• The SMC–AEV–Meralco and Prime Infra–First Gen transactions are political rescue operations transferring assets among leveraged elites. 
• Direct relief has been delivered through taxpayer-funded suspensions (e.g., Real Property Taxes for IPPs) and electricity price hikes to sustain overleveraged “green” portfolios. 
• Record fiscal outlays shift resources toward the state, elite firms, and banks. 
• BSP’s easing cycle provides the monetary channel to accommodate the whole structure. 

This is not reform—it is redistribution upward. 

The great economist Frédéric Bastiat’s "legal plunder" describes the mechanism; Acemoglu-Robinson’s extractive institutions describe the outcome: enrichment of incumbents, depletion of the real economy, and accumulation of malinvestment. 

A fourth fault line left to be discussed: The Philippine real estate bubble. 

XIX. Encore: From “Manageable Deficit” to Crisis Trigger

2025 already saw GDP pull the rug out from under the institutional optimists. 

The next phase is simpler:

• Rising debt
• Weakening revenues
• Record spending
• External borrowing
• Peso strain
• Price pressures
• Monetary accommodation
• Banking-system transmission

This is how sovereign balance-sheet stress becomes a macro-financial shock.

The question is no longer whether debt climbs. 

It is whether the system can finance it without a solvency event. 

Will 2026 be the year national finances follow Ernest Hemingway’s arc—gradually, then suddenly? 

And when the adjustment comes, does the peso simply slip past 60—or does something in the system fracture before it gets there?

Because the endgame of fiscal ochlocratic social democracy isn’t fairness—it’s insolvency masked as compassion. 

_____

References: 

Prudent Investor Newsletter, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025 

Prudent Investor Newsletter, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 7, 2025 

Prudent Investor Newsletter,  Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23,2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025 

 

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

 

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

In this issue

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

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

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

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

IV. The USDPHP Cap: A Hidden CPI Subsidy

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

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

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

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

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

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

But is this optimism warranted? 

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

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

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

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

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

Figure 1

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

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

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

But what about its future implications? 

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

As noted in February,  

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

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

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

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

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

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

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

But how true is this?

Figure 2

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

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

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

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

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

Could this signal diminishing returns—mainly from refinancing? 

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

Figure 3

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

And it’s not just inflation. 

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

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

So, where has demand gone? 

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

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

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

Figure 4 

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

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

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

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

IV. The USDPHP Cap: A Hidden CPI Subsidy 

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

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

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

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

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

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

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

Figure 5

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

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

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

Figure 6

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

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

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

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

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

Our bet is on the latter.

___

References  

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

 

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.