The reason that interventionism does not work is that it misallocates
more resources in the economy. More importantly, it disturbs, distorts, and
destroys the corrective process whereby entrepreneurs, the price system, and
the bankruptcy and foreclosure procedures do their jobs in reallocating
resources and prices back into a sustainable framework—Mark Thornton
Stagflation Then and Now: Why Philippine Markets Are
Repricing Like the 1970s (Part 4)
I. Prelude:
Stagflation: From Distortion to Repricing
II. The 1970s Stagflation: Adjustment Deferred, Not Avoided
III. Why It “Worked”: Structure and Illusion
IV. The Structural Break: From Production to Balance Sheets
V. The Misdiagnosis: Policy as Cause vs Policy as Reaction
VI. PSE: “Cheap” Is Not Value—It’s a Signal
VII. The Real Parallel: Mispricing Before the Break
VIII. Financial Markets: When the Adjustment Starts Showing
IX. From FX to Interest Rates: The Repricing Chain
X. The Policy Trap: Tighten Into Weakness
XI. Conclusion: The Illusion Is Ending
Stagflation Then and Now: Why Philippine Markets Are
Repricing Like the 1970s (Part 4)
Why today’s Philippine crisis is less about shocks—and
more about structure
I. Prelude: Stagflation: From Distortion to Repricing
This piece builds on a series of reports examining how policy interventions have reshaped the transmission of inflation and risk in the Philippine economy.
Earlier work showed that measures such as price controls, subsidies, and liquidity support did not eliminate underlying pressures. They delayed and redistributed them—shifting inflation across sectors, compressing real incomes, and allowing imbalances in the currency, credit system, and fiscal position to accumulate beneath the surface.
This follows earlier reports, including:
- Stagflation Is Already Here—Emergency Policies Are Now Entrenching It
- Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook
- The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)
Across these, the pattern has been consistent: stability was not the resolution of imbalances—but their deferral.
This installment extends that framework by placing current market behavior—particularly in foreign exchange, equities and fixed income—within a historical context.
The objective is not to argue that history repeats.
It is to show that while the structure has changed, the mechanism has not.
Markets reprice when constraints begin to bind.
And increasingly, that repricing is no longer isolated.
It is systemic.
A note on context: the parallels to the 1970s should not be read as a direct comparison of regimes. The policy structure, institutional constraints, and transmission channels today differ significantly from the Marcos Sr. period. What persists is not the form—but the mechanism of deferring adjustment. (See linked note.)
II. The 1970s Stagflation: Adjustment Deferred, Not Avoided
The Philippines is not new to stagflation.
The oil shocks of 1973 and 1979 triggered inflation surges, currency pressure, and eventually a full-blown financial crisis in 1983.
But what made the 1970s episode instructive is not the shocks themselves—it is how the system absorbed and deferred them.
Figure 1
Following the 1969 balance of payments (BoP) crisis, the peso was sharply devalued, moving from roughly 3.9 to near 6 per dollar, before continuing a managed depreciation into the 7–8 range by the early 1980s. (Figure 1, topmost pane)
The adjustment was immediate—but the consequences were not.
Growth held. Real GDP expanded strongly in 1973 and again in 1976—until the early 1980s (Figure 1, middle image)
Inflation surged during the oil shocks, with 1973 posting a sharper initial spike (~35% peak) than 1979 (~22%). Yet the true inflation (~63%) blowout did not occur during the shocks themselves—it came later, during the 1983 debt crisis. (Figure 1, lowest visual)
This is the first principle:
Inflation peaks at the point of financial rupture—not at the initial disturbance.
Figure 2
Equities confirm the same pattern. The Philippine stock index, the Phisix, reached an all-time high in January 1979—in the middle of stagflation. The collapse only followed when the system’s accumulated imbalances finally surfaced. (Figure 2, upper window)
What appeared as resilience was, in reality, deferred adjustment.
III. Why It “Worked”: Structure and Illusion
The 1970s economy was industry-led, and the market reflected it. (Figure 2, lower graph)
Mining, commodities, banks, and industrial conglomerates dominated the headline index—the Phisix, presently the PSEi 30.
Figure 3
Mining firms like Atlas, Benguet, Philex, and Marinduque were not peripheral—they were central. Mining alone likely accounted for roughly a quarter to a third of market weight at points in the decade. (Figure 3, upper table)
This mattered.
Commodity inflation translated directly into nominal earnings growth. The stock market rose not despite stagflation—but partially because of its structure within it.
But this alignment masked fragility.
- External borrowing recycled global liquidity
- Policy smoothing suppressed volatility
- Currency management slowed visible adjustment
This is straight out of Hyman Minsky financial instability hypothesis:
Stability is not the absence of risk—it is the accumulation of it under suppressed volatility.
By the early 1980s, the system had transitioned from hedge finance → speculative → Ponzi-like dependence on refinancing.
When confidence broke in 1983, the adjustment was
nonlinear and disorderly:
- Peso collapse
- Inflation spike
- GDP contraction
- Equity drawdown exceeding 80%
The 1970s didn’t avoid crisis.
They financed its delay.
IV. The Structural Break: From Production to Balance Sheets
The biggest mistake today is treating stagflation as if it still transmits through the same channels.
It doesn’t.
The Philippine economy is now services-led. The equity
market is concentrated in:
- Financials
- Services
- Utilities
- Conglomerates
This is no longer a production-driven system—it is a balance-sheet-driven system.
Which means stagflation now transmits through:
- Leverage (public and private) [domestic claims-to-GDP reached all-time highs in Q4 2025, coinciding with a reacceleration in M2 and M3/GDP] [Figure 3, lower graph]
- External funding dependence
- Liquidity conditions
- Credit creation and rollover risk
This dynamic is closer to a balance-sheet-driven transmission mechanism—more in line with Richard Koo’s framework—than classical supply-shock stagflation.
Growth doesn’t collapse immediately.
It gets financially
constrained first.
V. The Misdiagnosis: Policy as Cause vs Policy as Reaction
The mainstream framing—that BSP tightening is "hurting growth and markets"—gets the sequence wrong.
Tightening is not an exogenous shock.
It is a lagged reaction to prior distortions (e.g. savings-investment gap), which are being reinforced by current emergency policies, including:
- Price suppression (energy, transport)
- Subsidy transfers
- Fiscal expansion
- Liquidity injections
This is where Friedrich Hayek’s theory of malinvestment
becomes critical:
Artificially suppressed price signals do not eliminate inflation—they misallocate capital, embedding inefficiencies that eventually require a more painful correction.
When tightening finally arrives, it does not “cause” fragility.
It reveals it.
VI. PSE: “Cheap” Is Not Value—It’s a Signal
The persistent discount of Philippine equities is often framed as ‘opportunity.’
That interpretation is increasingly untenable.
The discount reflects:
Figure 4
- Narrow market breadth
- Index concentration risk, including free-float-driven weight concentration in a small number of large-cap names (e.g., International Container Terminal Services Inc. and Manila Electric Company), with combined index influence at unprecedented levels [Figure 4, topmost image]
- Weak transmission from growth to earnings
- Broadening dependence on leverage rather than productivity
- Deepening price distortions that transmit into real-economy misallocation
This is consistent with Public Choice Theory dynamics:
Policy frameworks optimize for political constraints rather than economic efficiency, producing structural drag that markets eventually price.
“Cheapness” here is not cyclical.
It is structural risk pricing.
VII. The Real Parallel: Mispricing Before the Break
The deeper parallel between the 1970s and today is not oil.
It is this:
Stagflation distorts asset prices before it destroys them.
The break occurs when financing conditions can no longer sustain the distortion.
- In the 1970s → external debt crisis
- Today → balance sheet compression + liquidity stress → ???
The danger may not be immediate collapse.
It is prolonged mispricing.
VIII. Financial Markets: When the Adjustment Starts Showing
Recent market behavior suggests the adjustment is no longer latent.
From the outbreak of the February 28, 2026 Iran war to May 1, Philippine equities have materially underperformed regional peers—the second worst performer after Indonesia, while the peso has simultaneously weakened to record levels. [Figure 4, middle diagram]
But the sequencing matters more than the outcome:
- Government securities outflows began in Q4 2025 and worsened in Q1 2026, dragging overall foreign portfolio flows to their deepest quarterly outflows since at least 2020 [Figure 4, lowest chart]
- PSE outflows persisted throughout 2025
- Currency weakness accelerated into 2026
- External shocks have accelerated volatility.
They did not initiate it.
This aligns with Dornbusch Overshooting Model dynamics:
Exchange rates adjust rapidly—not because shocks are new, but because imbalances were already embedded.
What we are seeing is not reaction.
It is exposure.
Attributing the move to a “strong dollar” or external shocks is not analysis—it is attribution bias dressed up as explanation, deflecting from domestic policy choices that built the conditions for this adjustment.
Global factors may set the trigger.
Domestic imbalances determine the magnitude.
IX. From FX to Interest Rates: The Repricing Chain
The move past 61 in USDPHP is not a currency story.
It is the first visible break in a multi-layer repricing cycle.
The sequence is now clear:
Figure 5
1. FX moves first
Driven by external deficits, energy imports, depletion of
buffer and capital outflows.
2. The belly reprices (3–7Y)
Reflecting expectations of forced policy tightening (Figure 5, topmost pane]
3. Term premiums widen (10Y and beyond)
Consistent with duration risk being repriced beyond near-term policy expectations [Figure 5, middle image]
This progression is not occurring in isolation.
The widening spread between Philippine 10-year yields (BVAL) and U.S. Treasuries (TNX) has tracked the move in USDPHP, reinforcing the pattern: currency stress is being matched by higher required returns on local duration. [Figure 5, lowest chart]
This is not simply global rates pulling yields higher.
It is domestic risk being repriced across FX and bonds simultaneously.
X. The Policy Trap: Tighten Into Weakness
Unlike 2021–2022, the system now faces:
- Weaker growth
- Higher fiscal dependence
- More fragile balance sheets
Which creates a constraint:
- Policy cannot ease without worsening inflation and FX pressure.
- Policy cannot tighten without compressing growth and liquidity.
This is a classic stagflationary policy trap.
And it reinforces our core thesis:
The peso is not the cause.
It is the pressure valve.
These distortions are not abstract. Recent
interventions—from the suspension and subsequent restoration
of the Wholesale Electricity Spot Market (WESM)—effectively redistributing
costs rather than removing them (which affirms
our recent call), to staggered power rate adjustments and subsidy layering,
to DOLE
looking at a Php 600 minimum wage hike in NCR, to the CHED
declaring no tuition increases to the BSP’s April
CPI projection heating up 5.6% to 6.4% —illustrate the same pattern: prices are suppressed, pressures accumulate
upstream, and are later released
into the system with greater force.
Figure 6
This distortion is already visible at the firm level. Manila Electric Company [PSE:MER] belatedly release 2025 Annual Report shows (pre-war, pre-oil shock) revenues rising sharply—driven not by demand, but by pass-through charges, regulatory recoveries, and expanding generation-side income—even as electricity consumption contracts. [Figure 6]
The divergence is structural: nominal revenues are being supported by fuel costs, grid charges, currency effects, and reserve market dynamics, while underlying usage weakens.
This is the money illusion in practice—where rising prices and cost recovery sustain top-line growth, masking real demand erosion.
It also reveals how regulatory and policy frameworks redistribute cost pressures—disproportionately benefiting incumbents and entities positioned within the regulatory structure—rather than absorb them. Within a pass-through pricing system, higher fuel, currency, and grid costs are transferred directly to consumers, sustaining revenues while weakening purchasing power.
Over time, this produces structurally higher and less competitive energy costs—eroding real incomes and compressing savings.
In a consumption-driven economy, that is not resilience.
It is price-induced demand compression/demand destruction.
It also shows that downstream utilities are not insulated from stagflation—they internalize it through pricing while externalizing its costs to consumers.
XI. Conclusion: The Illusion Is Ending
The lesson of the 1970s is not that stagflation causes immediate collapse.
It is that systems can appear stable while imbalances accumulate beneath the surface.
That dynamic has not changed.
What has changed is structure.
Then, distortions were anchored in production and commodities—where rising prices could partially offset inflation’s drag.
Today, fragility sits in balance sheets, within a consumption-driven economy increasingly dependent on credit.
This distinction matters.
Consumption financed by leverage is inherently unstable.
It holds—until financing conditions tighten.
Which means the
adjustment is not guaranteed to be gradual.
It can appear contained—until constraints bind.
They expose imbalances already embedded in the system.
When that
happens, the transition is no longer linear.
It becomes a sudden repricing of demand, liquidity, and risk.
Deferred adjustment does not eliminate crisis.
It compounds and compresses it.
The market is not misreading noise.
It is beginning to price a system where stability depends
on conditions that may no longer hold.
