The pretended solicitude for the nation’s welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money—Ludwig von Mises
In this issue:
USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress
I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility
II. Strong US Dollar Narrative Debunked
III. BSP’s Easing Cycle, Data vs. Narrative
IV. Cui Bono? (Redux)
V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal
VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables
VII. Averch–Johnson Trap and Public Choice Theory in Action
VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets
IX. Bank Liquidity Strains Beneath the Surface
X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending
XI. Keynesian Malinvestment and Policy Distortions
XII. AFS Losses and HTM Fragility
XIII. Banks Compound the Crowding Out Dynamics
XIV. The Biggest Borrower Is the State
XV. Public Revenues Are Collapsing
XVI. A Budget as Bailout
XVII. The Sovereign–FX–Savings Doom Loop
VIII. Conclusion: The Real Story: Bailouts Everywhere
XIX. Encore: From “Manageable Deficit” to Crisis Trigger
Notice: This will likely be my last post of 2025 unless something interesting comes up. Have a safe, relaxing, and enjoyable holiday season! 🎄🎅
USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress
From peso weakness to systemic unraveling: energy and fiscal bailouts, malinvestment, and the illusion of stability.
I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility
On December 9, the USDPHP surged to a new record high—its third all-time highs since crossing the BSP’s 59-level “Maginot Line” on October 28. Yet despite the historic print, the pair has traded within an unusually narrow range—depicting active BSP intervention to suppress volatility
This suppression of volatility has continued to date, with USDPHP retreating to the 58 level. The pair closed at 58.7 on December 19, roughly 0.9% below the record high of 59.22.
Media outlets swiftly attributed the move to expectations of a BSP rate cut. Others defaulted to the familiar refrain of a “strong dollar.”
II. Strong US Dollar Narrative Debunked
Let us address the latter first.
On the day the peso set a new record low, the US dollar weakened against 24 of the 28 currency pairs tracked by Exante Data. The Philippine peso stood out as one of only four Asian outliers—during a week when Asian FX broadly strengthened.
Figure 1
Moreover, the USDPHP has been on a steady ascent since May 2025, while the dollar index (DXY) peaked in September and has since shown signs of exhaustion. There is zero empirical basis to attribute this peso collapse to dollar strength. (Figure 1, topmost pane)
But attribution often follows convenience—particularly when political patrons prefer comforting narratives.
III. BSP’s Easing Cycle, Data vs. Narrative
Now back to the first premise: interest rates as tinder to the USDPHP fire.
Two days after the peso hit its latest record, the BSP announced its fifth policy rate cut of 2025 on December 11, the eighth since the easing cycle began in August 2024. This was accompanied by two reserve requirement (RRR) cuts—in September 2024 and March 2025—the latter bundled with a doubling of deposit insurance coverage.
Why this aggressive easing?
Like a religious incantation, the establishment rationalized BSP’s actions as growth stimulus. As the Inquirer noted, the BSP acted "as concerns about weakening economic growth outweighed the risks of peso depreciation."
The BSP claims data-dependence. But has it examined its own history?
Instead of catalyzing growth, repeated easing cycles have coincided with GDP deceleration— from 2012–2019, and again during the post-pandemic banking system rescue from Q2 2021 onward, even after interim rate hikes. (Figure 1, middle window)
The much-cited “flood control” episode only emerged in Q3 2025, long after the damage was done.
So the question remains: cui bono?
Certainly not MSMEs.
The beneficiaries are balance-sheet-heavy incumbents with preferential access to credit, regulatory relief, and FX protection.
Bank compliance rates for MSME lending fell to historic lows in Q3 2025 as headline GDP slowed to pandemic levels. (Figure 1, lowest chart)
The post–Global Financial Crisis easing playbook produced the same result: banks found it cheaper to pay penalties than lend to MSMEs.
Most tellingly, the BSP removed the MSME lending compliance data from its website last week.
And why now?
Because the data exposes the failure of both the Magna Carta for MSMEs and the BSP’s easing doctrine: liquidity was created, but it never reached the productive economy—the transmission channel broke down.
This is not a failure of transparency.
The peso is not reacting to rate cuts as stimulus. It is repricing a regime in which monetary easing now functions as fiscal accommodation and elite stabilization—diverting and diminishing productive credit.
Removing an indicator does not eliminate the risk factor—it merely eliminates early-warning signaling
And elite debt is one of the central forces driving this policy response.
V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal
As we have previously noted: “In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022.” (see reference, PSEi 30 Q3 and 9M 2025 Performance, November)
And that’s just the PSEi 30.
Financial fragility has intensified to the point that authorities have begun instituting explicit and implicit bailout measures.
The regulatory relief via the suspension and forgiveness of real property taxes (RPTs) for independent power producers (IPPs) provided circumstantial—but powerful—evidence that the SMC–AEV–Meralco triangle was not an isolated deal, but part of a phased continuum: transactional camouflage, regulatory condonation, financial backstopping—ultimately leading to either socialization or forced liberalization. (see reference, Oligarchic Bailout—December)
Crucially, the asset-transfer phenomenon in the energy sector is not confined to the SMC–AEV–MER axis. (see reference Inside the SMC–Meralco–AEV Energy Deal—November)
Prime Infrastructure, controlled by tycoon Enrique Razon, acquired 60% of Lopez owned First Gen’s Batangas assets for Php50 billion. This occurred alongside broader liquidity-raising measures by the Lopez Group, including the sale of roughly 30,000 square meters of its ABS-CBN headquarters in Quezon City for Php 6.24 billion, and the termination of the ABS-CBN–TV5 partnership due to financial disagreements.
VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables
At the same time, regulatory support has extended beyond asset transfers.
The Energy Regulatory Commission (ERC) approved the collection of the Green Energy Auction Allowance (GEA-All) on top of the existing Feed-in Tariff Allowance (FIT-All), explicitly allowing renewable developers to recover costs directly from consumers. These mechanisms institutionalize tariff pass-throughs as balance-sheet support.
Figure 2
Aggregate data underscore the scale of the problem. As of 9M 2025, the combined debt of major listed renewable firms—AP, ACEN, FGEN, CREC, SPNEC, and ALTER—surged from Php Php490.1 billion in 2024 to Php 682.2 billion in 2025, a 39.2% increase! (Figure 2, topmost table)
The sharpest percentage increases came from SPNEC, ALTER, and CREC.
Taken together, debt is the common thread now binding the Philippine energy sector’s restructuring.
Beyond the SMC–AEV–Meralco triangle, leverage stress is visible across ownership groups. First Gen’s heavy debt load, the Lopez Group’s asset disposals, and Prime Infrastructure’s acquisition of operating assets all point to balance-sheet defense rather than expansion. These are not growth reallocations but late-cycle capital triage.
The Prime Infra–First Gen transaction fits the same pattern seen elsewhere: risk is being relocated, not resolved. Mature energy assets migrate toward entities best positioned to manage regulatory and political risk, while leverage remains embedded in the system. Market discipline is deferred, price discovery suppressed, and time is bought—without reducing aggregate debt exposure and systemic malinvestments
These are not M&A events. These are distressed-asset reallocations under sovereign protection.
Renewables exhibit the same logic through a different channel.
VII. Averch–Johnson Trap and Public Choice Theory in Action
Under FIT-All and GEA-All, tariff pass-throughs convert private leverage into consumer-backed cash flows.
This is the Averch–Johnson trap in practice: capital intensity and debt are rewarded, inefficiency is preserved, and default risk is implicitly backstopped—reaffirming public choice theory in action: concentrated benefits, dispersed costs; privatized gains, socialized losses.
Firms such as SPGEN, ALTER, and ACEN are not anomalies. They are rational actors responding to a regulatory regime that socializes balance-sheet stress through electricity prices.
All these said, asset transfers in conventional power and tariff-embedded support for renewables show that the sector is no longer allocating capital for efficiency or growth. It is preserving leverage. Whether through strategic transactions or regulatory pass-throughs, losses are being deferred and dispersed—into consumers, banks, and ultimately the sovereign—confirming that the energy sector has entered a late-cycle rescue phase rather than a genuine transition.
In the Philippines, ESG is not a financing premium—it has become a political guarantee of revenue recovery.
In essence, these bailouts are not energy policy. They are rent-seeking protectionism.
VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets
But elite debt isn’t the only problem.
For every borrower is a creditor—a counterparty. And banks are heavily exposed.
Total financial resources (TFR) rose 6.76% to Php 35.311 trillion, with bank assets expanding faster at 7.2% to Php29.21 trillion last October. (Figure 2, middle image)
Both sit at the second-highest nominal levels on record. Banks now hold 82.74% of TFR, and universal/commercial banks (UCs) account for 76.8% of that. UC banks make up 92.87% of total bank assets.
The Bank-UC share of TFR has risen steadily since 2007—and the pandemic recession accelerated that centralization trend.
Fundamentally, bank centralization of financial assets means:
- They dominate credit allocation and distribution.
- They generate and circulate most liquidity and money supply.
- In a low-volume, savings-deprived system, they are the dominant players in capital markets (stocks and bonds).
- They command the financial-intermediation process.
A BSP-driven concentration of financial assets therefore escalates concentration risk. Yet almost no mainstream analysts address this.
IX. Bank Liquidity Strains Beneath the Surface
Even less is said about the intensifying liquidity strains in the banking system.
Despite supposedly “manageable” NPLs, banks’ cash-to-deposit ratio hit all-time lows last October. Liquid assets-to-deposits plunged to 47.44%— a level last seen during the March 2020 pandemic outbreak—essentially erasing the BSP’s historic Php 2.3 trillion liquidity injection. (Figure 2, lowest graph)
This signals that tightening bank cash reserves mirrors tightening corporate liquidity.
And the pressures are not just from the elite portfolios—they span bank operating structure.
X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending
Figure 3
NPL ratios have been propped up by a Wile E. Coyote velocity race: NPLs are near all-time highs, but their growth is masked by faster loan expansion. The 3.33% gross NPL ratio in October reflects gross NPL growth of 2.43% YoY versus 10.7% TLP growth. As long as credit velocity outruns impairment, the illusion of stability persists. (Figure 3, topmost visual)
Yet NPLs also remain strangely “stable” even as GDP momentum breaks and unemployment rises—an inversion of normal credit dynamics. In a normal cycle, deteriorating growth and labor markets should push impairments higher; the fact that they don’t suggests suppression, rollover refinancing, and delayed recognition rather than genuine asset quality.
Consumer credit cards illustrate the spiral—receivables at Php 1.094 trillion, NPLs at Php 52.72 billion, both at record highs. (Figure 3, middle diagram)
Since 2020, the BSP’s rate cap and the recession pushed banks toward a consumer-credit model—where consumer credit growth now outpaces production loans. That dynamic amplifies inflation: too much money chasing too few goods.
The consumer-loan share of UC lending (ex-real estate) hit a record 13.73% in October, while production loans fell to 86.27%—an all-time low. (Figure 3, lowest chart)
XI. Keynesian Malinvestment and Policy Distortions
This reflects Keynesian stimulus ideology—the belief that consumers can borrow and spend their way to prosperity. Its Achilles heel is the disregard for balance sheets and malinvestment risks.
Banks have now wagered not only on elites but a widening consumer base—including subprime borrowers. And because participation in consumer credit remains limited, concentration keeps rising.
Pandemic-era regulatory relief still suppresses benchmark NPL recognition.
XII. AFS Losses and HTM Fragility
Simultaneously, banks accelerated balance-sheet leverage through Available-for-Sale (AFS) assets—another velocity game.
Figure 4
Losses in financial assets have slowed earnings. AFS exposure surged from 3Q 2023 to today, closing the gap with Held-to-Maturity (HTM). As of October, AFS and HTM made up 41.04% and 51.21% of financial assets, respectively. (Figure 4, topmost diagram)
Financial-asset losses climbed from Php 16.94 B (1Q 2023) to Php 41.45 B (3Q 2025), which capped profit growth—banks earned just 2.5% more in 3Q 2025. (Figure 4, middle image)
HTMs act as hidden NPLs and suppressed mark-to-market losses, worsening liquidity drought. Cash ratios peaked in 2013 and have declined ever since—mirroring the rise of HTM.
It’s no coincidence that record-high HTMs accompany the surge in banks’ net claims on central government (NCoCG). In October, NCoCG hit Php5.663 T (2nd-highest on record), and HTMs reached Php4.022 T (also near a record). (Figure 4, lowest graphs)
Siloed government securities—rationalized under "Basel compliance"—combined with NPL overhang (consumer and likely under-reported production) and asset losses help explain slowing deposit growth.
Velocity masking is inherently pro-cyclical. When velocity slows, NPL truth appears—all at once
XIII. Banks Compound the Crowding Out Dynamics
Banks are now forced to compete with elites and the government for scarce household savings.
Figure 5
Bank bonds and bills payable stood at Php1. 548 trillion in October 2025, down 3.44% YoY but still hovering near record highs. (Figure 5, topmost pane)
To meet FX requirements and even assist the BSP in propping up Gross International Reserves (GIR), banks have increasingly tapped global capital markets. BSP data show the banking system’s external debt rose 0.3% to $28.97 billion in Q3 2025—its third‑highest level. BDO itself raised US$500 million through five‑year fixed‑rate senior notes in November 2025. (Figure 5, middle graph)
Meanwhile, BSP’s Net Foreign Assets climbed 2.12% YoY, driven by a 26.3% surge in Other Deposits Corporation (ODC) FX assets—a growth spiral over the last three months that underscores a rapid FX-liquidity build-up outside deposit funding and a scramble for offshore liquidity.
When banks become the transmission channel for fiscal deficits, corporate rescues, consumer support, and green‑subsidy pipelines, the endgame isn’t stability—it is deposit fragility, duration risk (asset‑liability mismatch), and the erosion of market discipline. These are the seeds of a balance sheet crisis, with BSP backstops looming ominously over a weak peso.
XIV. The Biggest Borrower Is the State
The biggest borrowers are not only the elites and the banks—the government itself stands at the center.
Last September, the Bureau of Treasury signaled that public debt would ease toward year-end through scheduled amortizations and a slowdown in issuance.
We warned that without genuine spending restraint; any dip would be a temporary statistical blip.
And so it was. After two months of declines, public debt surged 9.6% YoY to Php 17.562 trillion in October—just Php1 billion shy of July’s record Php17.563 trillion. Local borrowings climbed 10.6%, outpacing external debt growth of 7.53%.
Why would debt slow when deficit spending remains unchecked?
XV. Public Revenues Are Collapsing
Authorities and media largely ignored the mechanics behind October’s seasonal surplus (Php 11.154 billion), driven by a reporting artifact (the shift from monthly to quarterly VAT).
They fixated on the headline numbers: a spending dip linked to the flood-control scandal, and 6.64% shrinkage in collections.
The bigger picture was ignored: BIR’s 1.02% growth was its weakest since December 2023; Bureau of Customs fell 4.5%; non‑tax revenues collapsed 53.3%
The 10-month numbers confirm structural decay: revenue growth slid to 1.13%, the weakest since 2020. Tax revenue growth of 7.45% is also at post-pandemic lows. BIR’s 9.6% is a four-year trough; BoC’s 0.9% has drifted toward contraction; non-tax revenues collapsed 36.7%—the weakest since at least 2009.
A narrow decline in the fiscal deficit (Php1.106 trillion—third-largest on record) provides no comfort. With two months remaining, the deficit can surpass 2022’s Php1.112 trillion and approach 2021’s Php1.203 trillion—entirely dependent on tax performance. (Figure 5, lowest visual)
Since GDP drives revenues, these numbers reaffirm the dynamic: slowing growth, rising unemployment, yet oddly “stable” NPLs—a contradiction sustained by velocity illusions.
Expenditure growth may remain muted by political scandal, but revenue weakness is decisive.
XVI. Debt and Debt Servicing Is Crowding Out Everything Else
Record public debt now drives record servicing. As of October, Php1.935 trillion in debt payments has nearly breached the Php2.02-trillion 2024 record—a gap of barely 4.3% with two months to go.
The identity is mechanical: (as discussed last August, see reference)
- More debt → more servicing → less for everything else
- Public and private spending are crowded out
- Revenue cannot keep pace with amortization
- FX depreciation and inflation risks accelerate
- Higher taxes become inevitable
This process is becoming more apparent by the month.
Yet ideology prevails. Despite weakening revenues and slowing nominal GDP, Congress has passed a record Php 6.793‑trillion 2026 budget.
Figure 6
The headline implies “just” a 7.4% increase from 2025, but because spending targets for 2025 were revised downward, the 2026 expansion is far larger once fully implemented. (Figure 6, topmost window)
The cut to DPWH—politically expedient after a corruption uproar—was simply reallocated to entities like PhilHealth. No discipline, just reshuffling.
Record spending in the face of a deteriorating economy is not stimulus—it is a fiscal bailout in progress.
XVII. The Sovereign–FX–Savings Doom Loop
An economy with an extreme savings-investment gap and a quasi-‘soft peg’ to the USD must fund deficits externally. Public sector foreign debt reached USD 90.6 billion in Q3—up 11.7% YoY, with a record 61% share of the total. (Figure 6, middle image)
Every peso the state cannot fund through revenue must be sourced from bank balance sheets—through deposits, government securities, or offshore borrowing. The sovereign becomes a debtor to the banking system, and the banks become debtors to households. That is the sovereign–bank–household doom loop.
This external financing occurs despite a stretched fiscal capacity: the Q3 deficit-to-GDP ratio of 6.63% was the fourth-widest on record, achieved at the expense of households via intensifying financial repression and crowding-out. (Figure 6, lowest chart)
Despite mainstream optimism about “manageable” fiscal health, current dynamics risk unraveling into fiscal shock.
Monetary loosening—locally and globally—is masking fragility. When that cover fades, the peso absorbs the shock.
VIII. Conclusion: The Real Story: Bailouts Everywhere
While the public fixates on the corruption scandal, bailouts continue in real time—implicit and explicit, fiscal and regulatory.
- The SMC–AEV–Meralco and Prime Infra–First Gen transactions are political rescue operations transferring assets among leveraged elites.
- Direct relief has been delivered through taxpayer-funded suspensions (e.g., Real Property Taxes for IPPs) and electricity price hikes to sustain overleveraged “green” portfolios.
- Record fiscal outlays shift resources toward the state, elite firms, and banks.
- BSP’s easing cycle provides the monetary channel to accommodate the whole structure.
This is not reform—it is redistribution upward.
The great economist Frédéric Bastiat’s "legal plunder" describes the mechanism; Acemoglu-Robinson’s extractive institutions describe the outcome: enrichment of incumbents, depletion of the real economy, and accumulation of malinvestment.
A fourth fault line left to be discussed: The Philippine real estate bubble.
XIX. Encore: From “Manageable Deficit” to Crisis Trigger
2025 already saw GDP pull the rug out from under the institutional optimists.
The next phase is simpler:
- Rising debt
- Weakening revenues
- Record spending
- External borrowing
- Peso strain
- Price pressures
- Monetary accommodation
- Banking-system transmission
This is how sovereign balance-sheet stress becomes a macro-financial shock.
It is whether the system can finance it without a solvency event.
Will 2026 be the year national finances follow Ernest Hemingway’s arc—gradually, then suddenly?
And when the adjustment comes, does the peso simply slip past 60—or does something in the system fracture before it gets there?
_____
References:
Prudent Investor Newsletter, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025
Prudent Investor Newsletter, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 7, 2025
Prudent Investor Newsletter, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23,2025
Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025
