The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

 

What we have here is the Keynesian error that inflation cannot emerge while widespread excess capacity exists. Underpinning this error are two dangerous fallacies: The first error treats inflation as a case of rising prices. In fact, rising prices are a symptom of inflation and one that is not always present if we think of prices in absolute terms. The second error treats capital as homogeneous. What this means is that Treasury and Reserve officials are arguing that stagflation is impossible. Mainstream economists have never grasped the fact that it is the heterogeneous nature of capital that makes stagflation possible—Gerard Jackson 

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3) 

In this issue

I. The Stagflation Trap Tightens

II. The BSP’s Rate Hike and the Return of Monetary Tightening

III. The Record Balance-of-Payments Deficit

IV. The Yield Curve’s Warning Signal

V. Liquidity Is Not Confidence

VI. Fiscal Expansion and the Demand Leak

VII. Inflation Is Being Politically Managed

VIII. Mounting Social Stress Signals

IX. The Emerging Policy Trap

X. Conclusion: Stagflation 3.0: Cure is Worse than the Disease 

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3) 

Rate hikes, fiscal expansion, and politically managed inflation are pushing the Philippine economy deeper into a stagflationary policy trap.

I. The Stagflation Trap Tightens 

In two earlier essays—“Stagflation Is Already Here—Emergency Policies Are Now Entrenching It” and “Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook”—we argued that the Philippines was drifting toward policy configurations that increasingly reinforces the feedback loop between inflation and weakening growth. 

The Bangko Sentral ng Pilipinas’s (BSP) rate hike, the country’s record first-quarter balance-of-payments deficit, and widening fiscal pressures all point to the same underlying tension: policymakers are attempting to stabilize inflation, manage external vulnerabilities, sustain growth, and preserve financial stability in the banking and credit system simultaneously. 

This last constraint is often understated but central. 

Monetary policy in practice does not operate in a binary space between inflation and growth. 

It also operates through the credit channel: low interest rates support liquidity, asset valuations, and leveraged expansion, while higher rates trigger repricing of risk, debt service stress, and potential balance sheet compression. 

In this sense, policy is not only balancing macroeconomic objectives—it is also managing the fragility created by prolonged credit expansion—now worsened by supply dislocation. 

This is why tightening cycles are rarely clean. 

Higher rates are used to defend the currency and anchor inflation expectations, but they also risk exposing leverage accumulated during extended periods of low rates and accommodative liquidity conditions. 

Conversely, prolonged easing supports growth and asset markets but increases internal and external vulnerability through accumulated malinvestments and artificial inflation inertia. 

The result is not a simple trade-off between inflation and growth, but a multi-layered constraint between: 

• price stability
• external balance
• growth momentum
• financial system stability 

Instead of resolving these tensions, policy actions across fiscal, monetary, and regulatory fronts are increasingly interacting in ways that amplify them. 

This article—the third installment in the stagflation series—examines how those pressures are now converging across three fronts: 

• monetary tightening
• external financing stress
• administrative management of inflation 

Together, they reveal an economy gradually slipping into a policy trap. 

II. The BSP’s Rate Hike and the Return of Monetary Tightening 

The BSP’s decision to raise policy rates marks a significant pivot after nearly two years of easing and liquidity support.

While the move is formally framed as an inflation response, its immediate macro function is increasingly linked to exchange rate stabilization under external pressure. 

This distinction matters.

Figure 1

Inflation pressures had already been building before the Iran war’s oil shock—adding a new external impulse. (Figure 1, upper window) 

After the record 60.748 closing at the end of March, the USDPHP reached an intraday all-time high of 60.8, then closed at 60.7 per dollar last April 24—the second highest, possibly due to BSP interventions. 

All this shows that at this threshold, the policy constraint is no longer just price stability. It becomes external financing stability. 

A weakening peso increases the domestic cost of:

• imported fuel
• food inputs
• industrial commodities 

But more importantly, it raises the cost of servicing external obligations and financing import dependence, particularly in energy. 

This puts the central bank in a constrained position. 

Higher interest rates are used to:

• defend the currency by narrowing interest differentials
• reduce capital outflow pressure
• stabilize expectations in FX markets 

But these same rate increases risk tightening domestic credit conditions in an economy already facing weak external demand and rising import costs. 

The BSP therefore faces a dual transmission problem: 

• defend the peso to contain imported inflation
• avoid over-tightening that weakens domestic growth and financial stability 

The fact that the BSP is tightening policy while imposing regulatory relief for banks reflects this intensifying tension between external stabilization and internal fragility management. 

And it is not only the central bank responding to these pressures. 

Citing risks related to the Middle East conflict and global energy uncertainty, a major domestic bank—Bank of the Philippine Islands—recently indicated that it has begun tightening consumer credit standards. 

While framed as a precaution against external shocks, the move may also reflect mounting stress within household balance sheets, particularly after credit-card non-performing loans reached record highs as of December 2025— reinforcing what we describe as the Wile E. Coyote “denominator effect” dynamic. (Figure 1, lower image) 

This is no longer a pure inflation cycle. It is increasingly a balance-of-payments-sensitive monetary tightening regime. 

III. The Record Balance-of-Payments Deficit 

The external sector is now the primary amplifier of domestic macro stress.

Figure 2

The Philippines recorded a record first-quarter balance-of-payments (BoP) deficit, reflecting sustained net dollar outflows. (Figure 2, topmost pane) 

At its core, the balance of payments measures whether the country is accumulating or depleting foreign currency buffers. A deficit signals persistent dollar leakage. 

The immediate drivers are familiar:

• rising energy import costs and persistent trade deficits
• weaker portfolio inflows amid higher global interest rates
• capital outflows and elevated external debt repayments 

But the more important mechanism is how the system actually finances external shocks. 

Energy and oil price spikes do not simply show up as higher import bills. They are absorbed through a layered financing structure: external borrowing, portfolio inflows into government securities, and—crucially—drawdowns of foreign reserves. 

Gross International Reserves (GIR) function as the first shock absorber, temporarily covering imbalances before adjustment shows up in the exchange rate. This buffer, however, is not neutral. The BSP reported that GIR fell by over USD 6.6 billion in March 2026 to USD 106.6 billion—the largest monthly decline since at least 2012—driven partly by valuation effects from gold prices, but also by intervention pressures and external payment financing needs. (Figure 2, middle and lowest graphs) 

This is where recent bond market dynamics and index-related inflows become relevant: they operate less as signals of confidence and more as temporary financing channels for external imbalances that the reserve buffer alone cannot fully absorb. 

The result is sustained pressure on the peso. 

Exchange rate movements reflect underlying imbalances—particularly when dollar inflows are insufficient to cover import demand and debt-related outflows—while also serving as the primary adjustment mechanism. 

That adjustment then feeds directly into domestic inflation, given the Philippines’ structural dependence on imports for:

• fuel and energy inputs
• food commodities
• intermediate industrial goods
• consumer goods 

The causal chain is therefore not simply: 

BoP deficit → peso depreciation → inflation 

but, more comprehensively, can be framed as: 

external shock (energy) → higher import bill and financing needs → increased reliance on borrowing, portfolio inflows, and reserve drawdowns → depletion of GIR buffers → widening BoP deficit → FX market pressure → peso depreciation → imported inflation → monetary tightening

At that point, monetary policy is no longer setting conditions independently. It is reacting to external financing constraints embedded in the energy import structure of the economy. 

In effect, economic growth itself becomes constrained by the availability of external financing. When an economy relies heavily on imported energy and persistent trade deficits, expansion requires a steady inflow of foreign capital or reserve drawdowns to finance those gaps. Once those inflows weaken, growth becomes limited not by domestic capacity alone, but by the system’s ability to secure foreign currency. 

IV. The Yield Curve’s Warning Signal 

Financial markets reacted immediately to the rate hike. 

Figure 3

Philippine government bond yields spiked at the belly of the curve, producing a bearish flattening. 

In practical terms:

• mid-term yields rose sharply, reflecting inflation risk and policy tightening expectations
• long-term yields rose less, suggesting markets expect weaker growth and eventual policy easing or constraint 

This pattern is not neutral.

A bearish flattening typically emerges when investors believe tightening will compress economic activity faster than it resolves inflation pressures. 

But in the current context, the signal is more specific than a standard cycle interpretation. 

The yield curve now reflects a system where three constraints are converging simultaneously:

• monetary tightening aimed at defending inflation credibility and the currency
• widening fiscal deficits increasing sovereign issuance and duration pressure
• external financing stress amplifying currency risk and imported inflation 

In that sense, the curve is not simply pricing slower growth. 

It is pricing policy collision with structural imbalances. 

When fiscal expansion, external deficits, and monetary tightening operate simultaneously, bond markets begin to shift from pricing inflation expectations to pricing sustainability constraints—particularly the ability of the system to finance itself without continuous external support. 

This is the point where yield curves begin to reflect not just cyclical tightening, but the kind of debt and financing sustainability concerns highlighted in the work of Reinhart and Rogoff on emerging market stress episodes. 

In this environment, the BSP’s rate hike may still anchor short-term inflation expectations, but the curve suggests markets are increasingly focused on the medium-term interaction between fiscal expansion, inflation, external vulnerability, and growth deceleration. 

The message is therefore not only that tightening may slow growth. 

It is that policy tightening is occurring inside a system where fiscal and external constraints are already binding. 

V. Liquidity Is Not Confidence 

One development that risks obscuring these structural weaknesses is the Philippines’ expected inclusion in a major emerging-market bond index administered by JPMorgan Chase. 

Index inclusion is widely celebrated by authorities as a vote of investor confidence. 

But the mechanics are more prosaic. 

Funds that track such indices must purchase Philippine bonds once the country enters the benchmark. The resulting inflows are technical reallocations, not necessarily discretionary investment decisions based on improving fundamentals. 

In other words, passive flows can create liquidity without signaling confidence. 

In some cases, they can even mask underlying fragility by making it easier for governments to finance deficits. 

Indeed, the Philippines’ inclusion appears to have followed a liquidity surge rather than a return surge. 

Based on ADB data, secondary-market trading volume in Philippine government securities jumped more than 60% in 2025, while foreign holdings climbed to around 4.9%—roughly returning to 2019 levels. (Figure 3, middle and lowest charts) 

Yet despite heavy positioning during the Treasury rally, bond investors have seen limited gains. 

Liquidity arrived—but returns did not. 

That distinction matters. 

Markets can become liquid for many reasons—index rebalancing, regulatory shifts, or global liquidity spillovers—but sustained investor confidence usually reveals itself through returns, not merely trading volume. 

Meanwhile, the macro backdrop tells a different story. 

Fitch Ratings recently revised the Philippines’ sovereign outlook from stable to negative, citing the country’s exposure to energy price shocks and rising external vulnerabilities. 

A negative outlook does not immediately change the country’s investment-grade rating. But it signals growing concern about medium-term macroeconomic risks. 

If fiscal deficits continue widening while the balance-of-payments gap expands, the inflows triggered by index inclusion may end up financing deeper imbalances rather than resolving them. 

And if stagflation pressures intensify, the same liquidity that entered mechanically could leave just as mechanically.  

In that scenario, investors who mistook liquidity for confidence may discover that liquidity works both ways. 

VI. Fiscal Expansion and the Demand Leak 

Fiscal dynamics form the third pillar of the stagflation risk. 

Government spending continues to support domestic demand, but part of that demand inevitably leaks into imports—particularly energy and capital goods. 

The macro mechanism is straightforward:

• Fiscal expansion boosts domestic spending.
• Higher spending increases imports.
• Imports widen the trade deficit.
• The trade deficit worsens the balance-of-payments gap.
• Currency depreciation raises inflation. 

In effect, fiscal stimulus partially leaks into the external sector and returns as inflation through the exchange rate. Monetary tightening must then offset not only domestic demand pressures but also external price transmission through the peso. 

Recent fiscal data confirm that this dynamic is already unfolding. 

March 2026 expenditures reached Php 654.8 billion, the second-largest March spending level on record and the largest outside December, traditionally the peak disbursement month.

Figure 4

Despite a seemingly modest 5.23% year-on-year increase, the government still posted a Php 349.7 billion deficit, the third-largest monthly deficit historically and the largest outside December. (Figure 4, topmost visual) 

For Q1 2026, total expenditures reached Php 1.49 trillion, up 3.2% year-on-year and the largest first-quarter spending level on record. The deficit for the quarter reached Php 355.5 billion, the second-largest first-quarter deficit historically, even though headline narratives emphasized that the deficit had “narrowed” relative to last year. (Figure 4, middle diagram) 

A closer look at revenues reveals additional fragility. 

Total revenues rose 9.25% in March and 13.74% in Q1, but this growth was heavily skewed toward non-tax revenues, which jumped 45.5% in March and more than doubled (149%) in Q1. 

Much of this increase reflects early dividend remittances from Government-Owned and Controlled Corporations (GOCCs)—a timing maneuver rather than evidence of strengthening economic activity. 

As a result, non-tax revenues accounted for roughly 14.6% of total collections, the second-highest share since 2020 when emergency pandemic measures inflated similar inflows. (Figure 4, lowest image)

Figure 5

By contrast, the core signal of economic momentum—tax revenues—showed clear weakness.

Q1 tax collections grew only 4.04% year-on-year, the slowest pace since the pandemic recovery year of 2021 and comparable to the subdued 4.21% growth recorded in 2023. (Figure 5, upper pane) 

In other words, fiscal revenues are increasingly being supported by extraordinary transfers rather than organic economic expansion. 

Meanwhile, spending pressures are likely to intensify. 

The 2026 national budget totals Php 6.793 trillion. With Php 1.49 trillion already disbursed in Q1, roughly 22% of the annual program has been spent. 

This leaves Php 5.30 trillion to be disbursed over the remaining nine months of the year—equivalent to an average of roughly Php 589 billion per month, implying materially higher spending ahead. 

Several forces could accelerate that pace: 

• emergency energy spending amid global supply risks
• catch-up infrastructure disbursements after a slow start to the year
• election-cycle fiscal pressures
• seven consecutive years of spending allocation exceeding enacted budgets (Figure 5, middle graph) 

Debt servicing is already reflecting the cumulative impact of these dynamics.

Total debt servicing—interest and amortization combined—soared 115.6% year-on-year in Q1 to Php 737.4 billion, marking the second-largest quarterly debt service burden since 2024. (Figure 5, lowest chart) 

This increase reflects the combined effects of:

• higher borrowing levels
• elevated global interest rates
• weaker peso conditions
• the compounding impact of repeated deficits 

As fiscal spending accelerates through the remainder of the year, additional borrowing will likely intensify this trend. 

All told, the fiscal accounts reveal a pattern consistent with stagflationary stress: 

• slowing tax revenue growth pointing to weaker economic momentum
• rising programmed public spending, alongside emergency spending increases responding to energy shocks and slowing economic momentum
• increasing debt service tightening fiscal constraints 

The result is a familiar macroeconomic configuration: weakening growth alongside expanding deficits and rising public debt. 

And because much of that fiscal stimulus ultimately leaks into imports, the adjustment returns through the exchange rate—feeding the very inflation pressures the central bank is now attempting to contain. 

VII. Inflation Is Being Politically Managed 

Perhaps the most revealing aspect of the current environment is how authorities are attempting to manage rising costs. 

Instead of relying primarily on monetary policy, the government has increasingly turned to administrative interventions across sectors.

Examples include: 

• price caps on essential food items such as canned sardines—even as producers warn that sardine prices will soon rise
• pressure on oil companies to implement fuel rollbacks
• regulatory threats that the state could intervene or even take over segments of the petroleum industry for non-compliance
• sustained fare suppression for domestic transport operators 

Yet policy treatment is far from uniform. 

Aviation regulators recently allowed airlines to raise fuel surcharges, pushing up ticket prices. Meanwhile, land transport operators remain subject to fare suppression even as fuel and operating costs climb. 

The result is an asymmetric price system. 

Some sectors are allowed to pass on costs. Others are forced to absorb them. 

Such asymmetry reveals that inflation is increasingly being managed politically rather than economically. 

Sectors with concentrated market power or stronger institutional leverage are allowed to adjust prices, while politically sensitive sectors—particularly those affecting mass consumers—are subjected to administrative controls. 

The result reflects a familiar political-economy pattern: concentrated benefits and dispersed costs, a dynamic long observed in the work of economist Mancur Olson. 

At the same time, price caps and administrative rollbacks distort the information function of markets. Prices cease to transmit signals about scarcity, costs, and demand conditions. Instead, they become political variables. 

As Friedrich Hayek argued, when price signals are suppressed, economic coordination deteriorates. 

Producers respond by cutting output, delaying investment, or reducing quantity (shrinkflation)—or quality adjustments (skimpflation) that eventually reappear as shortages or service deterioration. 

Recent reports of domestic carriers cutting routes after prolonged fare suppression illustrate how supply eventually adjusts when prices cannot. 

Ironically, the policy contradictions are now visible even in official inflation projections.

Figure 6

The BSP itself now expects inflation pressures to rise toward around 6.3% in 2026, despite the growing use of price caps and administrative interventions. (Figure 6, topmost image) 

With inflation averaging just 2.83% in Q1, the BSP’s 6.3% inflation outlook for 2026 implies roughly 7.5% inflation over the remaining nine months of the year. For example, sardine producers have already warned about price increases despite the DTI’s implicit price cap. 

In other words, the authorities appear to be tightening monetary policy while simultaneously acknowledging that inflation will remain elevated. 

As a side note, an average inflation rate of around 7.5% over the remaining nine months would reinforce our earlier prognostication of a third wave in the inflation cycle. (Figure 6, middle chart) 

That is to say, if inflation is expected to rise even under expanding price controls, the implication is difficult to ignore: the controls are not suppressing inflation—they are merely redistributing it across sectors and over time. 

What disappears from official price indices today often reappears tomorrow in the form of higher subsidies or balance sheet transfers, deteriorating service quality, or supply shortages.

Inflation, in this sense, is not being eliminated. It is being reallocated.  

Blunt truth: Price controls inevitably fail. 

VIII. Mounting Social Stress Signals 

The macroeconomic pressures described above are no longer confined to fiscal accounts, bond markets, or exchange rates. 

They are increasingly visible at the household or even at the grassroots levels. 

A recent SWS survey on perceived quality of life suggests a spike in the share of Filipinos reporting worsening financial conditions, potentially reflecting the cumulative impact of rising living costs, stagnant real incomes, eroding savings and weakening economic momentum. This trend has been gradually rising since 2018. (Figure 6, lowest image) 

At the same time, localized crises are multiplying. 

Within a span of roughly two weeks, three separate state-of-calamity declarations were issued: first in Cagayan de Oro, then in the City of Baguio, and most recently the Cagayan Valley region. Officials attribute these emergencies to a mix of drought conditions, energy costs, and disruptions to local livelihoods. 

But the clustering of such declarations raises a broader macroeconomic question. 

Natural shocks occur regularly in the Philippines. What appears to be changing is the economy’s ability to absorb them. 

When food prices surge, fuel costs rise, or weather shocks disrupt production, the system increasingly responds with emergency fiscal transfers, price interventions, and regulatory measures. Each episode becomes another localized crisis requiring state intervention. 

This deepening reliance on interventions suggests that the country’s economic shock absorbers—household savings, business buffers, and fiscal space—are eroding.

In a healthy expansion, localized shocks remain contained. In a fragile macro environment, they propagate outward. 

Seen in this context, the recent wave of calamity declarations may be less a series of isolated events than symptoms of a broader stagflationary environment: rising costs colliding with weakening growth. 

If that trajectory continues, the risk is not only persistent inflation but also a gradual drift toward recessionary conditions, where policy interventions attempt to cushion economic stress but worsen underlying imbalances. 

IX. The Emerging Policy Trap 

Overall, the week’s developments reveal a difficult macroeconomic configuration. 

The Philippines is confronting simultaneous and deepening pressures from three fronts:

• inflation driven by energy costs and currency depreciation
• fiscal deficits sustaining domestic demand
• external imbalances weakening the peso 

These forces are not independent. They interact in ways that constrain policy choices and reflect a self-reinforcing macroeconomic feedback loop. 

Large fiscal deficits sustain spending and credit expansion, but they also widen the country’s savings-investment gap. That gap must be financed through external borrowing and capital inflows. When those inflows weaken—as reflected in the record balance-of-payments deficit—pressure shifts directly onto the currency. 

Peso depreciation then feeds back into the domestic economy through imported inflation, particularly in energy and food. 

At that point, policymakers face increasingly uncomfortable and complex trade-offs with intertemporal and unintended consequences. 

• Higher interest rates may provisionally stabilize the currency but risk slowing already fragile growth.
• Fiscal support may momentarily sustain activity but widens external imbalances and inflation pressures.
• Administrative price controls may temporarily suppress headline inflation but distort supply and investment decisions. 

Each intervention therefore displaces stress elsewhere in the system—often with unintended consequences. 

What emerges is not a single policy mistake but a policy trap—a configuration where the available tools begin to undermine one another. 

Economist Hyman Minsky observed that prolonged periods of credit-supported stability often evolve into fragile financial structures. When shocks arrive, policymakers attempt to stabilize the system through further intervention, but each intervention can deepen the underlying imbalance. 

The result is a system that becomes increasingly dependent on policy management even as the effectiveness of those policies declines—effectively the law of diminishing returns at work. 

X. Conclusion: Stagflation 3.0: Cure is Worse than the Disease 

While earlier inflation episodes in the Philippines were largely associated with supply disruptions, concealed beneath the headlines were the fiscal, credit, and liquidity effects reinforcing them.

Yet the current environment appears structurally different.

The pressures now emerging reflect deeper forces:

•  persistent and deepening fiscal deficits
•  chronic external imbalances
•  currency weakness feeding imported inflation
•  populist policy interventions increasingly shaping price signals across sectors

 These dynamics are precisely what this Stagflation 3.0 series seeks to examine. 

Although we have long discussed the historical rhyme of Philippine CPI cycles, the term here does not describe a chronological phase of inflation. Rather, it refers to a series of analyses examining how current policy responses—fiscal expansion, administrative controls, and reactive monetary tightening—interact with structural imbalances in the Philippine economy. 

Viewed through this lens, the emerging risk is not simply higher inflation or slower growth. It is the interaction of both—stagflation. 

• Rising costs erode household purchasing power, leading to demand destruction.
• Slowing growth weakens investment and employment. 

Policy responses attempt to cushion these pressures but simultaneously constrain the policy space available to address them. 

In such an environment, macroeconomic management gradually shifts from preventing imbalances to managing their consequences—worsening socio-economic maladjustments. 

The cure becomes worse than the disease. 

And that dynamic may ultimately define the conditions this series describes as Stagflation 3.0.

 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

  

With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. There is less ground than ever for hoping that, so long as the people have no choice but to use the money their government provides, governments will become more trustworthy—Friedrich August von Hayek 

In this issue 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance

II. The USDPHP’s Suppressed Volatility

III. Media Agitprop and Be Careful of What You Wish For

IV. Lindy Effect: USDPHP’s  56-year Uptrend

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence

VI. Inflation: Same Story, Different Mask

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics

VIII. Employment Optics vs Labor Reality

IX. Deficits, Debt, and the Entropic Drift

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

Gold-inflated FX reserves, suppressed USDPHP volatility, and the slow collapse of the BSP’s soft peg—symptoms of a deeper political problem.

Nota Bene: 

For new readers, this post extends our earlier analysis and projections on USDPHP; please see the reference sections for our previous works. 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance 

2026 opened with USDPHP printing its fourth record high, touching 59.355 on January 7, placing the peso at an all-time low. This comes after the pair decisively breached the 59 level in October 2025—a threshold that, in practice, had functioned as a de facto boundary since late 2022, or roughly three years. 

Almost immediately, the Bangko Sentral ng Pilipinas (BSP) went public, stating it would not defend the peso, despite what it described as “tremendous pressure” to do so. 

This posture echoed its statement following the October breakout, where the BSP asserted that it merely “allows” market forces to determine the exchange rate. 

As we noted in a November 2025 post, such phrasing implicitly presupposes central bank supremacy over the market, implying that exchange-rate movements occur only at the BSP’s discretion—an assertion belied by the data.

II. The USDPHP’s Suppressed Volatility 

Figure 1

Absent official confirmation, one is reminded of Bismarck’s dictum: never believe anything in politics until it has been officially denied. Circumstantial evidence points strongly to prior intervention. In the seven instances when USDPHP approached or touched 59 before October 2025, both trading volume and realized volatility consistently compressed—a pattern difficult to reconcile with a freely clearing market. (Figure 1, topmost and middle panes) 

The same pattern has persisted after the breakout. 

While the BSP has ostensibly “allowed” USDPHP to violate its three-year boundary, average daily trading volume has trended downward since mid-2025, and by early January 2026 had fallen back to levels last seen in late 2024. Combined with a persistently narrow intraday trading range, this has produced a marked decline in day-to-day price changes. Put bluntly, suppressed volume has translated into suppressed volatility—a classic signature of administrative smoothing. 

III. Media Agitprop and Be Careful of What You Wish For 

Predictably, much of the self-righteous media attributed the peso’s latest record low to a “strong” US dollar. Yet the DXY remains broadly range-bound near its 2022 levels, despite a modest rebound from its mid-2025 trough. (Figure 1, lowest chart) 

The divergence is telling: USDPHP has been rising steadily since May 2025, even as the broad dollar index failed to make new highs. 

Yes, the dollar strengthened this week, appreciating against seven of ten Asian currencies tracked by Bloomberg, and USDPHP—up roughly 0.7% on the week—was among the largest movers. But context matters. 

Be careful what the establishment wishes for. Such agitprop risks becoming self-fulfilling. 

The US dollar may indeed be attempting a cyclical rebound. Should that occur, it would likely coincide with a tightening of global financial conditions, making dollar funding scarcer and more expensive. 

A stronger DXY would not cause domestic weakness—but it would expose internal fragilities that have been obscured by global easing. 

This pattern is consistent with Minsky’s financial instability hypothesis. Repeated suppression of exchange-rate volatility creates the illusion of stability, encouraging leverage, fiscal expansion, and balance-sheet risk. The eventual adjustment does not arrive as a shock—but as accumulated fragility ventilated through the peso.

Figure 2

As we argued last November, USDPHP spikes rarely occur in a vacuum. Historically, they coincide with periods of economic stress. Using BSP end-of-quarter data: (Figure 2) 

• 1983 debt crisis: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.2% over 6 quarters (Q1 1997–Q3 1998)
• Dot-com bust (1999–2004): +30.6% over 20 quarters (Q2 1999–Q1 2004)
• Global Financial Crisis: +17.0% over 5 quarters (Q4 2007–Q1 2009)
• Pandemic recession: +22.6% over 7 quarters (Q4 2020–Q3 2022) 

The current breakout, now coinciding with weakening growth momentum, fits this historical pattern uncomfortably well. 

IV. Lindy Effect: USDPHP’s  56-year Uptrend 

More importantly, the breach of the 59 level reinforces the USDPHP’s roughly 56-year secular uptrend. This can be viewed through Nassim Taleb’s Lindy Effect: not as a property of the exchange rate itself, but of the political-economic ideological regime that governs it. The longer a depreciation bias survives—across crises, cycles, and administrations—the more robust and persistent it proves to be. 

This trend is therefore measured not merely by age, but by repeated survival—by the durability of the policies, incentives, and fiscal behaviors that continually reproduce it.

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence 

This context is essential when evaluating the BSP’s reported December 2025 Gross International Reserves (GIR) of $110.872 billion. 

Figure 3

All-time-high gold prices played a decisive role in both the monthly and annual GIR outcome. Remarkably, the valuation gain on gold alone accounted for more than 100% of the roughly $4.6 billion year-on-year increase, while declines in foreign exchange investments exerted a drag on the headline figure.(Figure 3)

Figure 4

As a result, gold now represents its highest share of GIR in over a decade. This is especially striking given that the BSP was the largest net seller of gold in 2024, a move justified at the time as opportunistic monetization of high prices—and, more pointedly, on the argument that gold was a “dead asset.” (Figure 4, topmost and bottom graphs) 

Ironically, the BSP has since been incrementally rebuilding its gold position at higher prices than those at which it sold. 

As in 2020, gold once again served as a leading indicator. Then, large-scale gold sales—alongside increased national government’s external borrowing—were used to finance peso defense under a quasi-soft-peg regime. Once the proceeds were exhausted, borrowing constraints tightened, and usable FX reserves were drawn down, markets ultimately forced an adjustment: a weaker peso. (Figure 4, middle image) 

Briefly, BSP gold sales foreshadowed the 2020 USDPHP spike—and a rerun appears to be unfolding. 

Gold, however, is not equivalent to FX. It is less liquid in crisis: politically sensitive to mobilize, slower to swap into dollars, and volatile in mark-to-market terms. Markets understand this distinction—even if headline GIR figures do not.

Viewed counterfactually, had gold prices fallen in 2025, GIR would have declined materially, reserve-adequacy ratios would look materially worse, and narrative control would have been far more difficult. None of the reported strength reflects improved external competitiveness, durable capital inflows, or enhanced peso credibility. 

Gold did not validate policy. It rescued the optics. 

In that sense, the 2025 reserve story reveals something uncomfortable to the mainstream but unmistakable: serendipity saved incompetence. 

VI. Inflation: Same Story, Different Mask 

The government’s inflation narrative should feel familiar by now. 

Last week, sections of the mainstream media began warning—belatedly—about the impact of peso depreciation on electricity prices. This is hardly new. 

The Philippines’ recent inflation history has unfolded in distinct waves, each closely intertwined with the USDPHP.

Figure 5

During 2013–2018, the steady rise in USDPHP coincided with the first wave of inflationary upswing, which began building from 2015. The second wave in USDPHP (2021–2022) overlapped with the second inflation shock spanning 2019–2022, driven by global central bank easing, supply disruptions, energy prices, and domestic pass-through effects. (Figure 5, topmost image) 

What distinguishes the two episodes is not the inflation spike—but the disinflation phase that followed. 

From September 2018 to June 2021, USDPHP declined by roughly 11%, while CPI fell sharply from 6.7% to just 0.8%. As discussed previously, this period coincided with the BSP’s increasing reliance on Other Reserve Assets (ORA)—including derivatives, repos, and short-term FX borrowing—to manage the exchange-rate regime, a shift clearly visible in the GIR composition. 

In the current episode, the adjustment mechanism has been fundamentally different. 

Since first testing the 59 level in 2022, USDPHP has remained range-bound between 55 and 59, with no sustained appreciation. Yet headline CPI retraced materially—not because of currency relief or market forces, but due to a combination of: 

• Demand destruction, now evident in slowing GDP growth
• Administrative price controls, including ₱20 rice programs and mandated MSRPs
• Distortions arising from these interventions, masking underlying pressures
• Composition and measurement effects, aligned with political incentives for easing—particularly amid ongoing bailouts of the energy sector, banks, and real estate 

It was therefore no coincidence that a day before the October 2025 59-level breakout, the administration announced renewed price freezes, citing natural calamities as justification. 

Despite these measures, December CPI rose to 1.8%, well above consensus expectations, lifting quarterly inflation from 1.4% in Q3 to 1.7% in Q4. Disinflation, it appears, has already begun to fray. 

This erosion is further reflected in liquidity conditions. Bailouts in the energy sector coincided with an 8.26% year-on-year expansion in M3 in October, the fastest since September 2023. (Figure 5, middle diagram) 

November data remain unpublished. 

More broadly, the BSP has either delayed, discontinued, or reduced the frequency of several previously standard statistical releases—ranging from Bank’s MSME lending to stock market activities (transactions, index, and market capitalization) and more. Whether this reflects capacity constraints or political narrative sensitivity remains an open question. But opacity rarely improves credibility. 

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics 

While headline CPI surprised to the upside, food inflation for the bottom 30% of households turned positive for the first time since March 2025—a critical inflection point historically associated with rising hunger and self-rated poverty. (Figure 5, lowest visual)

Figure 6

Consistent with this, the SWS Q4 survey showed self-rated poverty rising to 51% of households, with another 12% on the borderline—a combined 63%. (Figure 6, upper chart) 

This deterioration in sentiment persists despite record consumer credit, near-full employment headlines, slowing CPI, pandemic-scale deficit spending, and still-positive GDP growth. 

This is not an anomaly. Improvements in self-rated poverty reversed as early as 2017, spanning two administrations and coinciding with a sustained surge in deficit spending. 

What is rarely discussed is that this reflects the redistributive and extraction effects of crowding out—the attenuation of the private sector in favor of the state and its preferred private sector intermediaries. 

Households have responded predictably by leveraging their balance sheets to sustain consumption amid eroding purchasing power, refinancing debt rather than building resilience through savings. 

This divergence between headline indicators and lived experience is a classic case of James Buchanan’s fiscal illusion. By diffusing costs through inflation, deficits, and administered prices, the state masks the true burden of adjustment—until it reappears in household balance sheets and public sentiment.

VIII. Employment Optics vs Labor Reality 

The government reported improving employment data last November. Less visible is that labor force participation has been declining since late 2022, while employment momentum shows signs of plateauing (via rounding top formation). (Figure 6, lower graph) 

More troubling is the quality of employment. Functional illiteracy remains widespread, MSMEs and informal work dominate job creation, and household income growth remains structurally dependent on OFW remittances. 

This combination explains why sentiment remains depressed—and why slowing GDP risks morphing into a more pernicious mix of rising NPLs, renewed inflation pressures from deficit monetization, or outright stagflation.

IX. Deficits, Debt, and the Entropic Drift 

Despite the rhetoric surrounding corruption and reform, the administration has signed a Php 6.793 trillion 2026 budget, ensuring that the entropic forces dragging on growth remain firmly in place.

Figure 7

Public debt rose to a record Php 17.65 trillion in November, up 9.7% year-on-year, defying the Bureau of the Treasury’s September projection of year-end declines. (Figure 7, middle and topmost images) 

Domestic debt expanded by 10.95%, while foreign debt rose 7%, continuing its gradual upward share since 2021.(Figure 7, lowest diagram) 

As we have repeatedly argued, expanding deficits mechanically imply rising debt and servicing burdens. Whether domestic or foreign, this accumulation heightens balance-sheet and duration risks. 

No amount of propa-news or fiscal newspeak alters that arithmetic. 

Eventually, these imbalances surface—in the exchange rate, inflation, interest rates, asset prices, and real activity. Not abruptly, but gradually, through a boiling-frog dynamic—a process that markets ventilate over time. 

As Mancur Olson warned, mature systems accumulate distributional coalitions that extract rents while resisting adjustment. The result is slower growth, rising inequality, and a political preference for redistribution over reform—precisely the conditions now reflected in peso weakness and declining household sentiment.

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later 

Unsurprisingly, liquidity-driven rallies continue to propel global equity markets, with the effect especially visible in Asia. The Philippine PSEi 30 gained 3.47% week-on-week (WoW), ranking fourth in the region. As evidence of speculative mania, nine of nineteen Asian indices closed at or near all-time highs for the first time, delivering unusually strong market breadth.

Figure 8

Yet the Philippine rally remains highly concentrated, with a handful of brokers and heavily traded issues generating most of the volume. The largest-capitalization stock, ICTSI, surged 12.5% WoW, almost single-handedly driving the PSEi 30, flanked by Jollibee (+12.32%) and AEV (+11.35%). (Figure 8, topmost visual) 

Weekly breadth within the PSEi 30 favored gainers (19 of 30), while the broader PSE recorded its best two-week breadth since January 2023—ironically, the PSEi 30 still closed 2023 down 1.77%. (Figure 8, middle window) 

Although the number of issues traded daily spiked to 2022 highs—often read as a sign of rising retail participation—main-board turnover averaged just Php 6.25 billion per day, a curious outcome amid New Year euphoria. (Figure 8, lowest chart) 

As with prior easing-driven rallies, such liquidity pumps tend to have short half-lives.

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

The November break of USDPHP 59 marked the unraveling of the BSP’s soft peg and exposed underlying economic fragility. December’s record highs made clear that this was not a transient overshoot, but the manifestation of deeper fault lines—fiscal bailouts, and mounting financial stress—expressed as widening bailouts initially at the energy sector 

January 2026 merely confirms the trajectory. What appears as resilience in the BSP’s foreign reserves has largely been valuation-driven. What looks like disinflation is increasingly administrative maneuvers. What passes for growth is the rising use of leverage, mounting deficits, and liquidity injections rather than productivity or competitiveness. 

In this sense, the peso’s decline is not an accident of global conditions. It is the byproduct of a political-economic regime that repeatedly socializes losses, crowds out private adjustment, favors centralization, predisposed to asset bubbles and substitutes newspeak for balance-sheet repair. 

The exchange rate is not the problem. It is the messenger. 

____

References

Friedrich von Hayek, Choice In Currency, A Way To Stop Inflation, The Institute Of Economic Affairs 1976 

Prudent Investor Newsletters, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025 

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025 

Nassim Nicholas Taleb An Expert Called Lindy January 9, 2017