EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

 

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference—Ludwig von Mises 

In this issue:

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

I. From Oil Shock to Emergency Response

II. The Rice Policy Template

III. Administrative Pricing Returns: The Suspension of the Power Spot Market

IV. Price Control Proof Is Already in the Streets: Shortages Appear

V. Crisis Messaging and Political Theater

VI. Crony Gains in an Energy Emergency

VII. The Financial Stability Motive

VIII. Markets Push Back

IX. Intervention Begets Intervention

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr.

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention 

How EO-110, emergency powers, and BSP policy are converging into a nationwide price-control regime. 

I. From Oil Shock to Emergency Response 

In a previous report, we warned that the Philippines might be entering the early stages of an oil shock.

Events over the past week suggest the policy response is now accelerating. 

Within a span of only a few days, the government has rolled out an unusually rapid sequence of interventions. 

• On March 24, the administration issued Executive Order 110, declaring a national energy emergency.
• On March 25, Congress moved to grant emergency authority to suspend fuel excise taxes.
• On March 26, the Bangko Sentral ng Pilipinas (BSP) held an off-cycle policy meeting and decided to keep interest rates unchanged. 

Each step has been framed as an effort to protect consumers from the impact of rising energy costs. 

Yet taken together, they reveal something broader: the emergence of an integrated policy approach aimed at suppressing the economic transmission of the oil shock. 

This strategy is not entirely new. 

It closely resembles the template already deployed in another politically sensitive sector—rice. 

II. The Rice Policy Template 

Over the past year, rice policy has increasingly relied on administrative intervention. 

The government imposed maximum suggested retail prices (MSRP), released reserves through the National Food Authority, introduced the highly publicized Php 20 rice program, and deployed fiscal subsidies to farmers and importers. 

In effect, the state has attempted to contain consumer prices by transferring costs elsewhere—through fiscal spending, balance-sheet adjustments, and administrative supply management. 

Public choice theorists such as James M. Buchanan and Geoffrey Brennan in The Power to Tax describe this phenomenon as fiscal illusion: the obscuring of the true cost of government through indirect financing—such as borrowing, inflation, or off-budget transfers—allowing policymakers to sustain the appearance of relief while shifting the burden forward. 

This same policy template now appears to be extending into energy markets. 

The national response to the oil shock has included:

• Suspension of transport fare increases
• fuel subsidies for operators
• intensified price monitoring and enforcement
• emergency procurement of oil supplies
• the suspension of fuel excise taxes
• intervention in electricity markets to contain price spikes 

Demands for price controls are also broadening, now encompassing LPG and imported rice. 

As with the rice program, these measures aim to soften the visible price impact of scarcity—while redistributing the underlying costs across the fiscal system and the broader economy.

Figure/Table 1

Policy intervention appears to be expanding sector by sector. Measures initially introduced to stabilize politically sensitive goods are gradually extending into energy markets and financial policy. (Table 1) 

III. Administrative Pricing Returns: The Suspension of the Power Spot Market 

The spread of price suppression is not limited to transport fuels. 

On March 25, the Energy Regulatory Commission ordered the temporary suspension of the Wholesale Electricity Spot Market (WESM) across the Luzon, Visayas, and Mindanao grids after simulations suggested electricity prices could surge to around ₱9 per kilowatt-hour amid the Middle East energy shock. 

The WESM is the Philippines’ real-time electricity trading platform, where elite owned and controlled power producers and distributors buy and sell electricity based on supply and demand conditions. Prices in this ‘caged’ market normally fluctuate to reflect fuel costs, generation capacity, and grid constraints. 

By suspending the market, regulators effectively replaced price discovery with administrative allocation. 

The objective is straightforward: prevent a sudden spike in electricity prices from feeding into consumer inflation. 

But the economic implications are significant. 

Spot markets exist precisely to coordinate supply and demand under changing conditions. When prices rise, they signal scarcity and encourage additional generation or conservation. 

Administrative suspension interrupts that signal. 

Instead of electricity being allocated through price adjustments, dispatch decisions increasingly become centralized—determined by regulatory directives rather than market incentives. 

The result may temporarily contain visible price increases, but it also risks creating deeper distortions in the power sector. 

Power producers must now operate under uncertain compensation conditions, while distributors and large consumers lose the market signals that normally guide electricity procurement. 

In effect, one of the country’s most important energy markets has been replaced—at least temporarily—by administrative pricing. 

This development reinforces a broader pattern emerging across sectors: the gradual substitution of price mechanisms with regulatory control. 

But suppressing prices does not eliminate the underlying imbalance between supply and demand. 

As Friedrich Hayek famously argued in The Use of Knowledge in Society, prices function as signals coordinating dispersed knowledge across the economy. Suspending markets may suppress volatility, but it also suppresses the information that allows the system to adjust. 

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them 

Or suppressing those signals inevitably disrupts the coordination process. It also shifts the adjustment to other parts of the economy.

Yet authorities have not only suspended WESM; they are reportedly considering permanently repealing the only partially deregulated segment of the energy sector, as well as the removal of VAT. Both measures may provide temporary relief, but such band-aid solutions carry the risk of future unintended consequences. 

Moreover, while reducing taxes may be desirable, without corresponding spending constraints this approach would likely worsen fiscal deficits and heighten the fragility of public finances. 

In effect, short-term interventions may shield consumers today, but they also deepen structural vulnerabilities that could amplify costs tomorrow. 

IV. Price Control Proof Is Already in the Streets: Shortages Appear 

Basic economic theory predicts that price ceilings eventually produce shortages. 

Early signs of this dynamic are already emerging. 

Reports indicate that more than 400 gasoline stations have temporarily closed, citing supply difficulties even as authorities insist that fuel inventories remain sufficient. 

Public transport is showing similar strains. 

Jeepneys in Quezon City and bus operators in Metro Manila (about 20%) and Baguio City (up to 50%) have significantly reduced operations, with stranded commuters and growing protests highlighting the mismatch between controlled fares and rising fuel costs. 

As an aside, this is just the first few days! 

Despite subsidy rollouts, the economics of operating public transport under capped fares have become increasingly difficult.

Figure 2

The result is a classic outcome described in the literature on price ceiling: supply contraction rather than price adjustment. (Figure 2, upper window) 

Retail markets are beginning to reflect the same pressures. 

Supermarkets and some food manufacturers have signaled price increases beginning April 1, reversing a March commitment to uphold a temporary two-month price freeze. The Department of Trade and Industry (DTI), however, insists that any price adjustments should not take effect until April 16. 

In the aviation sector, the pattern has been equally revealing. 

After the president warned that aircraft might be grounded if fuel shortages worsened, Philippine Airlines assured the public that jet fuel supplies were sufficient for the ‘foreseeable future.” 

Shortly afterward, the airline quietly cut several domestic and international flight routes  suggesting fuel conservation moves. 

These episodes illustrate a recurring feature of interventionist policy regimes: the widening gap between official reassurance and market behavior. 

V. Crisis Messaging and Political Theater 

Public messaging surrounding the energy situation has evolved rapidly. 

Initially, officials emphasized that there was ‘no energy crisis.’ 

More recently, the government has declared an energy emergency while simultaneously insisting that there is still no reason to panic. 

The pattern echoes a famous observation often attributed to Otto von Bismarck:

never believe anything until it has been officially denied. 

Policy actions suggest a far more serious assessment than the rhetoric implies. 

Authorities have begun cracking down on alleged fuel hoarding, floated the possibility of repealing elements of the country’s oil deregulation law, and raised the prospect of removing the value-added tax on petroleum products (as noted above). 

At the extreme end of the policy spectrum, discussions have even surfaced about the possibility of an energy lockdown should supply conditions deteriorate further. 

As political economist Albert O. Hirschman observed in The Rhetoric of Reaction, crisis politics often produces a distinctive rhetorical pattern: policies framed as temporary necessities gradually become permanent features of governance. 

Taken together, these measures suggest a steady expansion of administrative control not only over the energy sector, but more broadly across society. 

VI. Crony Gains in an Energy Emergency 

While the policy framework emphasizes consumer protection, the distribution of benefits within the energy sector tells a more complex story. 

Several large corporate groups appear poised to gain from the shifting landscape. 

Petron Corporation, a subsidiary of San Miguel Corporation (SMC), has reportedly sourced discounted Russian crude, including last week’s shipments of roughly 700,000 barrels. 

At the same time, Tycoon and SMC chair, Ramon S. Ang has revived proposals for the government to acquire Petron—a move that could effectively transfer part of the firm’s humungous debt burden onto the public balance sheet. 

Such a shift reflects what Gordon Tullock described as rent-seeking dynamics: firms capture gains during favorable market conditions, yet seek to socialize losses when the cycle turns. Private upside, public downside. 

Other developments point in a similar direction. Amid public pressure against coal, policymakers have signaled support for its “temporary” expansion under the banner of energy security—even as official rhetoric continues to favor renewables. 

Despite its political unpopularity, Department of Energy data indicate that coal accounted for an all-time high 62% of gross power generation in 2024. (Figure 2, lower image) 

A subsidiary of Manila Electric Company, Meralco PowerGen Corp. (MGEN), has reportedly expressed interest in assets linked to Semirara Mining and Power Corporation (PSE: SCC). 

Notably, some of these assets had already been subjected to regulatory or contractual rebidding processes prior to the current crisis.  

In that context, the present moment may be less a sudden policy shift than an acceleration of an existing trajectory—one in which administrative actions reshape ownership and market structure. The result is a coal sector that may not only revive, but consolidate under a few hands through policy-mediated channels.

Meanwhile, announcements surrounding the Camago-3 field within the Malampaya Phase 4 gas field development have been presented as evidence of incoming domestic supply. Yet such projects typically take years to materially affect output, and gas contracts remain indexed to global prices.  Absent subsidies, price relief is unlikely in the near term. For now, these announcements function more as reassurance than resolution. 

While the timing of benefits to consumers remains uncertain, the consortium—particularly Tycoon Enrique Razon led Prime Energy—is clearly positioned to capture upstream gains 

As Mancur Olson observed in The Rise and Decline of Nations, crises tend to strengthen “distributional coalitions”—organized interests that secure concentrated benefits while dispersing costs across the broader public. 

The pattern is hardly new. Frédéric Bastiat, in The Law, warned that when the state becomes an instrument for particular interests to extract from the public, law itself is transformed—from a protector of rights into a vehicle for legalized transfer. 

The emerging picture suggests not merely an energy response, but a reconfiguration of advantage. The beneficiaries appear to be those corporate groups already positioned to consolidate and potentially cartelize segments of the country’s energy supply chain. 

In effect, the crisis is not only redistributing costs—it also seems to be concentrating access to resources, decision-making power, and control in fewer hands. 

VII. The Financial Stability Motive 

The government’s intervention in energy and monetary policy may extend beyond protecting consumers. 

Energy shocks transmit rapidly through the financial system: higher fuel prices feed into consumer inflation, which in turn pressures the central bank to tighten policy. The BSP recently revised its 2026 inflation forecast to 5.1%—well above its 2–4% target, underscoring the magnitude of underlying price pressures. Rising interest rates reduce asset valuations and weaken collateral across the banking system.

Figure 3 

As an aside, the BSP’s 5.1% 2026 inflation forecast reveals much about their expectations. With January and February CPI at 2% and 2.4%, this implies that the average CPI for the remaining ten months would need to reach roughly 5.68%. Such a trajectory would push monthly CPI above 6%, potentially testing or exceeding the 8.7% high recorded in February 2023! If realized, this would reinforce what appears to be our long projected third wave of the CPI cycle since 2015. (Figure 3, upper graph) 

Banks in the Philippines are heavily exposed to property lending and government securities. A rapid rise in rates could trigger cascading balance-sheet pressures—falling bond prices, declining property valuations, and rising non-performing loans. From this perspective, suppressing the visible impact of the oil shock may help delay financial tightening. 

The BSP’s off-cycle decision to hold policy rates steady has been widely interpreted as part of this stabilization effort. Officials from the Bureau of the Treasury have acknowledged or admitted that maintaining stable borrowing conditions in the bond market was an important consideration. 

In effect, the policy response aims to keep inflation, interest rates, and asset prices contained simultaneously. 

These constraints are consistent with the structural limitations faced by semi-peripheral economies. The Philippines’ persistent savings–investment gap makes it reliant on external capital, which limits independent monetary policy and exposes the financial system to global market pressures. As Giovanni Arrighi observed, countries in the semi-periphery are structurally dependent on foreign financing and currency, leaving central banks with limited room to maneuver. 

The BSP is therefore not simply choosing between “good” and “bad” options; it is deciding which part of the balance sheet to protect first. 

VIII. Markets Push Back 

Financial markets rarely remain passive. The US dollar–Philippine peso exchange rate has surged to a record 60.55, marking a historic low for the peso. 

At the same time, government bond yields—particularly in the one- to seven-year segment—have moved decisively higher, underscoring growing unease about fiscal stability and inflation risks. (Figure 3, lower chart) 

Although Philippine equity markets have declined, trading patterns suggest that downside volatility is being deliberately managed, or at least cushioned, within the heavily weighted components of the PSEi-30 index. 

The market’s verdict appears clear: the Bangko Sentral ng Pilipinas (BSP) is likely to absorb external pressures through currency adjustment rather than aggressive rate hikes and use of reserves, constrained by fiscal realities. 

Inflation is nearing 5%, with second-round effects increasingly visible across transport, food, fertilizer, and electricity costs. These pressures are no longer isolated—they are feeding into broader economic feedback loops. 

Meanwhile, signs of strain are becoming more evident across the broader economy. 

The retail sector continues to undergo restructuring. Marks & Spencer has withdrawn its operations despite earlier signals of recalibration, while Robinsons Retail has announced the closure of its No Brand outlets. The conglomerate is also reportedly considering the possibility of delisting from the Philippine Stock Exchange. 

Taken together, these developments may reflect more than isolated corporate decisions. They point to a tightening environment for both consumers and listed firms, as financing conditions gradually shift and economic pressures intensify.

IX. Intervention Begets Intervention

Figure/Table 4

Intervention often follows a self-reinforcing cycle. Initial controls distort market signals, producing shortages that then justify further administrative action. (Figure 4) 

The trajectory of recent policy decisions follows a pattern long recognized in economic theory.

Austrian economist Ludwig von Mises argued that partial government intervention in markets tends to generate unintended distortions that eventually require additional intervention. 

Wrote the great von Mises 

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must enlarge the sphere of the commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.

Either production can be directed by the prices fixed on the market by the buying or the abstention from buying on the part of the public; or it can be directed by the government’s offices. There is no third solution available. Government control of a part of prices only results in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest. 

The preeminent Dean of Austrian School of Economics, Murray Rothbard’s concept of triangular intervention helps explain how regulating one set of exchanges can distort others, setting off a chain of interventions across sectors. 

A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging… 

Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people. 

More broadly, the expansion of state authority during crises was famously analyzed by historian Robert Higgs, who observed that emergency conditions often lead to permanent increases in government control over economic activity. 

The emerging policy response to the oil shock appears to be following this familiar path.

• Price controls lead to shortages.
• Shortages trigger enforcement actions.
• Enforcement expands administrative authority.
• Administrative authority creates new political and economic beneficiaries. 

The cycle then repeats.

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr. 

The Philippines has confronted energy shocks before. But the institutional setting of the crisis today differs profoundly from the one that shaped the policy response half a century ago. 

During the global oil shocks of the 1970s—particularly the 1973 Oil Crisis and 1979 Oil Crisis—the Philippines was already operating under authoritarian rule. Ferdinand Marcos Sr. had declared Martial Law in the Philippines in September 1972, consolidating political power and weakening institutional checks on executive authority. 

Energy policy therefore unfolded within a centralized political system capable of imposing controls, directing credit, and reorganizing industries with limited resistance. 

The current oil shock, by contrast, is unfolding under the presidency of Ferdinand Marcos Jr. within a formally democratic political structure. Instead of authoritarian command, policy is emerging through a rapid layering of interventions—executive orders, emergency powers, regulatory suspensions, subsidies, and monetary accommodation. 

This difference matters.

Figure/Table 5 

Energy shocks have struck the Philippines under both Marcos administrations. The key difference lies in the institutional pathway of intervention: centralized command under martial law in the 1970s versus layered regulatory and fiscal intervention within a democratic framework today. (Figure/Table 5) 

In the 1970s, authoritarian institutions allowed the state to impose controls directly and sustain them over time. Today, similar economic objectives must be pursued through a more fragmented political process involving subsidies, administrative pricing, and financial policy coordination. 

Yet the economic trajectory may still converge. 

The interventionist policies of the 1970s ultimately culminated in the Philippine external debt crisis of 1983, when mounting fiscal deficits, rising external borrowing, and weakening investor confidence forced a restructuring of sovereign obligations. 

Today’s macroeconomic backdrop exhibits its own form of imbalance. 

Fiscal deficits remain historically elevated. Public debt has risen sharply relative to national output. Liquidity conditions—reflected in rapid monetary expansion and sustained deficit financing—have reached levels rarely seen in the country’s economic history. 

Measured as shares of GDP, many of these indicators appear manageable. But GDP itself increasingly reflects government spending and credit expansion rather than productivity growth. 

In that sense, the underlying dynamics bear an uncomfortable resemblance to the earlier era.

The key difference is speed. 

During the 1970s, the accumulation of distortions took years to unfold. Today, early symptoms are appearing within days of the policy response. 

Transport shortages are already emerging only days after the declaration of the energy emergency. If such distortions persist, the policy logic may lead to further escalation: larger subsidies, deeper price controls, emergency procurement programs, and expanding administrative authority. 

Economic crises have historically been fertile ground for political centralization. Severe shocks—whether economic, geopolitical, or social—often generate the conditions under which governments justify extraordinary powers. 

The Philippines’ current constitutional framework imposes safeguards against such outcomes. Yet history also shows that institutional constraints can erode rapidly under sustained crisis conditions. 

Whether today’s oil shock remains an economic problem—or evolves into a broader political one—will depend less on official assurances than on the incentives shaping policy decisions in the months ahead. 

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

The oil shock may only be the beginning. EO-110 could come to be seen not as a solution, but as the opening phase of a broader cycle of intervention. 

From rice to fuel, from transportation to energy markets, policy is increasingly aimed at suppressing how rising costs flow through the economy—seeking to contain inflation, stabilize financial conditions, and preserve asset values. 

Yet economic reality rarely accommodates such efforts for long. Suppressing prices does not remove scarcity; it merely redirects it. The adjustment reemerges elsewhere—through fiscal strain, currency pressure, supply disruptions, or financial instability. 

The Philippines may therefore be entering not just an energy emergency, but a wider economic experiment: an attempt to delay market adjustment through expanding intervention. History suggests these efforts seldom end as intended. 

The real question is no longer whether adjustment will occur—but where the pressure will surface next.

 

 

 

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

 

People always look for political solutions to economic problems. Economic solutions are individually based; they amount to producing more and consuming less. Political solutions are collectively based; they amount to some people deciding how much wealth to take from some other people. The question is, how do political solutions manifest themselves?—Doug Casey 

In this issue

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks 

I. War, Oil, and Markets: The Shock Transmission Spreads

II. Stagflation Ahoy! Employment Weakens as Inflation Surges

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface

IIIA. Bank Liquidity Buffers Are Thinning

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling

IIIB.1 Liquidity Detaches From Credit

IIIB.2 External Liquidity Replaces Domestic Credit

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission

IIID. A Financial System Becoming Balance-Sheet Driven

IV. The Yield Curve’s Hidden Message

V. Oil Shock as the Catalyst for a Banking System Test

VI. The Policy Dilemma Ahead

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility  

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

The oil shock from the Middle East war exposes underlying financial strains in the Philippine economy, evident in the weakening peso, tightening bank balance sheets, and a shifting yield curve.

I. War, Oil, and Markets: The Shock Transmission Spreads 

Figure 1

Since the latest outbreak of the Middle East conflict involving US, Israel on Iran, global oil markets have repriced sharply. The US WTI and Brent Oil benchmarks have traded slightly below and above the $100/barrel. (Figure 1, topmost chart) 

For an import-dependent economy like the Philippines, the transmission mechanism was immediate. 

Three domestic market reactions stand out. The ‘oil shock’ aggravates the structural pressure from persistent external deficits from the deepening savings-investment gap imbalances 

First, the peso plunged to a record low against the dollar, with the USD/PHP exchange rate surging to 59.735, the highest level on record. (Figure 1 middle graph) 

The move reinforced the breach of the Bangko Sentral ng Pilipinas’ (BSP) 59-level “Maginot Line,” a ceiling the central bank had defended from 2022 through late 2025. 

The March 13 breakout was accompanied by interbank trading volume jumping 16% to roughly $2.23 billion, marking the fifth-largest turnover since 2025 amid the pair’s sharp upward spiral this March. 

Notably, earlier breakouts were rarely accompanied by comparable surges in trading volume, likely reflecting BSP interventions in the market. (Figure 1, lowest image) 

In contrast, the current episode appears to signal strong underlying demand for the US dollar, suggesting that momentum could soon put the 60 level to an immediate test. 

The oil shock further aggravates these pressures, compounding the peso’s weakness alongside persistent external deficits stemming from a widening savings–investment gap. 

Second, domestic equities began to unravel. 

The PSEi erased most of its early-year gains (+0.1% YTD as of March 13), as the prospect of higher energy costs—on top of rising inflation, weaker GDP growth, currency volatility, tighter financial conditions, and continued foreign selling—dampened sentiment and offset earlier orchestrated pumps of the index.

Figure 2 

Third, the domestic bond market began adjusting to mounting inflation risks. Philippine government securities sold off across the curve, while the yield curve reshaped itself through a bearish flattening—a configuration that typically signals rising financial stress rather than healthy growth expectations. (Figure 2, top and middle visuals) 

In short, markets quickly priced the oil shock not as a temporary disturbance, but as a binding macroeconomic constraint.

II. Stagflation Ahoy! Employment Weakens as Inflation Surges 

The ‘oil shock’ arrives precisely as the domestic economy is already emitting stagflationary signals. 

Inflation accelerated again in February. Philippine CPI rose to 2.4%, marking the fourth consecutive monthly increase and a 13-month high.

Figure 3

More alarming was the surge in food inflation for vulnerable households. Food CPI for the bottom 30% income group spiked from 0.6% in January to 2.2% in February, suggesting rising hunger and worsening self-rated poverty among a substantial share of families—despite the rollout of Php 20 rice programs and government-mandated maximum suggested retail prices (MSRPs). (Figure 3, topmost window) 

Crucially, these developments occurred before the oil shock. Yet the first wave of its impact is already visible:

• staggered ‘jumbo’ fuel price increases
• ferry operators beginning to raise fares
• gasoline stations reportedly hiking prices ahead of authorized adjustments
• the Department of Trade and Industry (DTI) warning against hoarding and profiteering
• Meralco announcing another power rate hike on top of January’s GEA-related increase
• Water Utilities, Maynilad and Manila Water to raise rates in the second quarter 

A further inflation risk lies in agricultural inputs. The Philippines remains heavily dependent on imported urea fertilizer, much of it sourced from the Gulf region. (Figure 3, middle diagram) 

Any disruption to supply chains or price spikes linked to Middle East tensions could raise production costs for domestic agriculture, creating second-round pressures on food prices in the months ahead. 

And more drastic adjustments are likely to follow. The snowballing effects and feedback loops from higher energy costs could feed into what may become the third wave of Philippine CPI cycle.

Figure 4

At the same time, as the GDP wobbles, labor market conditions are deteriorating. Unemployment rose to 2.96 million in January 2026—a pandemic era high, while underemployment also increased. Employment rate fell to 94.2%, lowest since June 2022 (Figure 4, topmost image) 

More concerning are the sectoral shifts beneath the headline numbers:

• agricultural employment contracted (Figure 4, middle chart)
• trade employment declined sharply
• labor force participation fell, suggesting that official unemployment figures may understate actual labor slack (Figure 4, lowest image)
• displaced workers increasingly moved into lower-productivity informal sectors 

Rising fertilizer costs also threaten agricultural employment and output, compounding the deterioration already visible in rural labor markets. 

These shifts are critical because they indicate weakening household income capacity precisely as prices for essential goods—fuel, electricity, and water—are rising. 

Moreover, with conflict in the Middle East ongoing, more overseas Filipino workers (OFWs) are being repatriated. This is not merely a humanitarian issue—it also carries macroeconomic consequences. 

As repatriations increase, returning workers expand the domestic labor pool, potentially pushing unemployment or underemployment higher. 

At the same time, fewer workers abroad could mean weaker remittance inflows, widening the Philippines’ balance-of-payments (BoP) deficit—a consequence of its savings-investment gap—and intensifying pressure on the peso.

Remittances are a key pillar of household consumption and savings formation, so disruptions could dampen domestic demand. 

This combination—rising costs colliding with weakening income growth—is the textbook definition of stagflationary pressure. 

For a banking system heavily exposed to consumer lending, mortgages, and corporate leverage, such an environment gradually erodes balance-sheet quality. 

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface 

The real story, however, lies beneath the macro headlines—in the financial plumbing of the banking system. 

Recent balance-sheet data from the Bangko Sentral ng Pilipinas reveal a system quietly tightening. 

IIIA. Bank Liquidity Buffers Are Thinning 

Key indicators already show signs of intensifying pressure.

Figure 5

Both cash-to-deposit and liquid-assets-to-deposit ratios have been trending downward, indicating that banks are operating with thinner liquidity buffers relative to their funding base. (Figure 5, topmost pane) 

At the same time, although the non-performing loan (NPL) ratio ticked higher in January from its May 2025 lows, the percentage metric masks a deeper Wile E. Coyote velocity dynamic. 

While the NPL ratio appears relatively contained, gross NPLs measured in pesos have actually climbed to fresh record highs in January. The expansion of bank credit—through the denominator effect—suppresses the ratio even as the absolute level of distressed loans continues to rise. (Figure 5, middle graph) 

To recall, aside from this denominator effect, the suppression of the NPL ratio can also arise from a combination of factors:

• loan restructurings
• charge-offs
• regulatory relief measures
• reclassification effects
• inaccurate reporting 

Viewed from the peso lens, NPLs reveal mounting distress within the system. Viewed from the ratio perspective, the deterioration appears modest. Yet the direction of travel remains critical. Historically, NPL ratios lag economic stress rather than lead it. 

If GDP weakens further while employment softens and energy prices help erode the purchasing power of the peso, this deterioration could accelerate. 

The dynamic resembles what Hyman Minsky described as the transition from hedge finance toward speculative finance. During periods of easy liquidity, borrowers accumulate obligations under the assumption that refinancing will remain available. But when shocks—such as an oil spike, fiscal strain, or currency depreciation—raise costs while eroding incomes, balance sheets that once appeared stable can quickly become fragile. 

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling 

The Bangko Sentral ng Pilipinas Depository Corporations Survey (DCS) provides a system-wide view of balance sheets across the banking sector. Recent data suggest that the traditional transmission mechanism between liquidity and credit creation is beginning to weaken. 

IIIB.1 Liquidity Detaches From Credit 

Historically, money supply growth in the Philippines has closely tracked bank lending. In a bank-dominated financial system, loans create deposits, and deposit expansion feeds directly into the growth of broad money. 

Recent data, however, show that this relationship has broken down. 

Universal and commercial bank loan growth has been rolling over since mid-2025 even as broad money (M3) continues to expand. The divergence suggests that liquidity creation is increasingly being driven by balance-sheet channels other than private credit expansion. (Figure 5, lowest visual) 

In other words, liquidity is still growing—but the mechanism generating that liquidity is shifting.

IIIB.2 External Liquidity Replaces Domestic Credit 

The shift becomes clearer when examining the external side of the banking system’s balance sheet.

Figure 6

Even as domestic lending slows (claims on Private sector), net foreign assets within the financial system have expanded. Higher gold prices, reserve valuation effects, and external borrowing have all contributed to rising foreign asset positions. Net foreign assets were up 5.9% and 10.2% in the first two months of 2026, while claims on the private sector posted hefty gains of 10.7% and 10.6% respectively. (Figure 6, topmost window) 

These external balance-sheet gains inject liquidity into the domestic financial system despite slowing private credit growth. 

The implication is that a growing share of monetary expansion is being supported by external balance-sheet dynamics rather than internal credit creation. 

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

Another structural shift appears in the composition of bank assets. 

As lending to the private sector slows, banks’ claims on the national government (NCoCG) continue to expand. This suggests that sovereign borrowing is increasingly absorbing liquidity within the financial system. (Figure 6 middle chart) 

When government borrowing begins to dominate balance-sheet expansion, it crucially reflects a crowding-out mechanism, in which the state becomes the primary absorber of financial resources while private credit growth weakens. 

This dynamic creates a paradoxical condition: liquidity remains abundant within the monetary system, yet the flow of credit into productive economic activity begins to substantially slow. 

From the perspective of Austrian capital theory, this shift reflects the kind of structural distortion that prolonged liquidity accommodation can generate. As the late Austrian economist Roger W. Garrison argued, credit expansions can redirect financial resources toward sectors or activities that appear viable only under persistently easy financial conditions. When lending momentum slows or funding conditions tighten, the underlying structure of investment begins to reveal its fragilities. 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission 

If the Depository Corporations Survey reveals the evolving structure of bank balance sheets, the Monetary Authority Survey (MAS) shows how the central bank’s own balance sheet is shaping liquidity conditions. 

Recent MAS data point to a subtle but important change in the character of monetary expansion. 

One revealing indicator is the divergence between currency in circulation and broad money growth. 

Currency issuance has slowed even as M3 continues to expand. Normally, expanding deposits eventually translate into greater currency usage as money circulates through the broader economy. 

When currency growth decelerates while deposits continue rising, it suggests that liquidity is remaining within the bank dominated financial system rather than circulating through real economic activity. 

This pattern suggests a financial environment in which monetary liquidity expands while bank balance-sheet liquidity tightens. 

Sovereign borrowing increasingly absorbs bank asset capacity while external balance-sheet dynamics inflate monetary aggregates. 

The result is a divergence: liquidity appears abundant in the monetary statistics even as credit transmission to the private economy weakens. 

IIID. A Financial System Becoming Balance-Sheet Driven 

Taken together, the signals from the DCS and MAS point to a financial system undergoing a structural transition. 

Bank lending growth is slowing. Domestic credit expansion is weakening. Currency circulation is decelerating. 

Yet monetary liquidity continues to expand—supported by external asset accumulation, sovereign borrowing, and balance-sheet adjustments within the financial system. 

In other words, system liquidity is still growing, but it is increasingly detached from private credit creation and real economic activity. 

Importantly, these shifts were already visible in the data before the oil shock emerged. The system entered the current energy shock with underlying financial imbalances already developing beneath the surface. 

The oil shock therefore did not create the stress now appearing across markets. It merely accelerated and exposed the structural strains that had already begun to form within the country’s financial architecture. 

IV. The Yield Curve’s Hidden Message 

Finally, the government bond market is beginning to reflect these tensions. 

Figure 7 

Since the outbreak of the Middle East conflict, the Philippine yield curve has shifted toward a bearish flattening, led by a selloff in the belly of the curve—particularly the 5- to 10-year segment. (Figure 7, upper chart) 

Even the front end, which typically reflects expectations about future monetary policy, has begun to rise. (Figure 7, lower graph) 

The increase in short-term Treasury bill yields suggests that markets are beginning to reassess expectations for monetary easing, reflecting growing concern that inflationary pressures and fiscal risks may constrain policy flexibility. 

Yet, such movements in the yield curve often emerge when markets begin pricing a combination of risks:

• inflation pressures
• weakening economic growth
• rising fiscal borrowing needs
• duration risk

Recent policy responses reinforce these concerns. Authorities have begun rolling out subsidies for tricycle and jeepney drivers, and the fisherfolks, including a proposed Php 3.5-billion program to subsidize commuters and partially finance the fuel costs of public utility vehicles (PUVs). 

In the world of “free-lunch politics,” such subsidies risk widening fiscal deficits. The Treasury curve increasingly appears to be pricing the possibility that oil-shock relief measures could translate into larger borrowing requirements and once again inflationary pressures. 

In other words, the curve is not signaling healthy economic expansion. 

Instead, it points toward tightening financial conditions and rising interest-rate pressures. Most importantly, it reflects financial stress emerging under inflation constraints. 

For banks, this shift in the yield curve is not merely a market signal. It directly affects funding costs, asset valuations, and the profitability of maturity transformation—the core business model of the banking system. 

V. Oil Shock as the Catalyst for a Banking System Test 

Taken individually, each of these developments might appear manageable. 

Taken together, however, they form a reinforcing loop. 

Higher oil prices worsen the trade deficit and weaken the peso—an outcome that organically reflects the widening savings-investment gap in the domestic economy. 

A weaker peso raises the cost of imports and intensifies inflationary pressures. 

Rising prices compress real household incomes, while employment weakens as economic growth slows. 

The deterioration of household balance sheets eventually translates into rising loan stress within the banking system. 

As risks increase, banks respond by tightening lending standards and slowing credit growth. The resulting credit contraction then further dampens economic activity, reinforcing the cycle. 

This is the mechanism through which macroeconomic shocks propagate through financial systems. 

VI. The Policy Dilemma Ahead 

The challenge for policymakers is that the traditional policy response may no longer be readily available. 

If inflation remains elevated due to oil prices and currency pressures, the central bank cannot easily deploy aggressive monetary easing. 

Yet if economic growth slows and credit conditions tighten, the usual policy reflex is to rely on easy-money support from the banking system.

If recession risks become imminent, the increasingly crowded fiscal space not only limits the scope for government intervention but may itself amplify financial fragility. 

This is the classic emerging-market policy trap: inflation constrains monetary easing just as financial fragility begins to demand it. 

The dilemma is not purely economic but also institutional. Public choice economists such as James M. Buchanan emphasized that policymakers face incentives to favor short-term stabilization over long-term adjustment. 

Over time, as Mancur Olson observed, institutional arrangements tend to accumulate rigidities that make meaningful reform increasingly difficult.

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility 

The current oil shock is not creating the Philippines’ financial vulnerabilities. It is revealing them. 

Years of debt expansion, fiscal deficits, and reliance on liquidity support have already stretched balance sheets across households, corporations, banks, and even the government itself. 

The war-driven surge in oil prices simply adds another layer of stress to an already fragile system. 

If energy prices remain elevated and the peso continues weakening, the Philippine banking sector may soon face a test not seen since the pandemic period—this time under far less accommodating global financial conditions. 

The coming months will determine whether the financial system can absorb the shock. 

Or whether the oil spike ultimately becomes the catalyst that exposes deeper structural strains within the country’s financial architecture. 

Caveat Emptor.