Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment

 

Throughout history, sovereign debt crises have never been about mathematics alone. They have always been political crises. Governments refuse to cut spending because elections are won by promising benefits, not sacrifices. Every political party campaigns on giving voters something while sending the bill to future generations. Eventually the markets stop believing those promises can be financed. That is when governments resort to higher taxes, financial repression, capital controls, inflation, and every other desperate measure designed to preserve the system—Martin Armstrong 

In this issue:

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment

I. Introduction: The First-Half Reckoning

II. EO 110 and the Politics of Deferred Adjustment

III. 1H 2026’s Record Fiscal Deficit and Record Public Debt Exposes the Cost of Deferred Adjustment

IV. The Adjustment Migrates to the Nation's Balance Sheet

V. Borrowed Stability: June’s BOP and GIR Improvements

VI. The BSP's Narrowing Policy Space

VII. The Politics of Deferred Adjustment: Increasing the Annual Income Tax Threshold

VIII. The Politics of Deferred Adjustment: Removing System Loss Charges from Electricity Bills

IX. Conclusion: The Record Twin Deficits and the Sovereign-Fiscal Doom Loop 

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment 

How Pandemic-Era Policies, EO 110, and Financial Interventions Transferred Inflationary Pressures Across Balance Sheets

I. Introduction: The First-Half Reckoning 

The previous installments of this series argued that the Philippine government's response to the 2024 oil shock did not eliminate the inflationary adjustment. It redirected it. 

This adjustment process did not begin with the oil shock. During the pandemic, emergency measures designed to stabilize demand, preserve employment, and prevent a deeper contraction were introduced as temporary countercyclical responses. Over time, however, many of these interventions became embedded features of the economic framework. EO 110 represented not a departure from that approach, but an extension of an already established pattern of using policy intervention to absorb economic pressures. 

Following the pandemic-era policy expansion, policymakers continued to rely on administrative controls, fiscal support, monetary accommodation, and regulatory intervention, with EO 110 extending this approach during the oil shock. 

The immediate objective was understandable: to soften the inflationary shock and sustain economic activity. Instead of allowing relative prices to coordinate the necessary adjustment, however, these measures shifted it across public and private balance sheets. 

The first half of 2026 marks an important point in that process. The National Government recorded the largest January-to-June fiscal deficit on record. Outstanding public debt surpassed Php 19 trillion for the first time after posting the second-largest first-half increase on record, while the merchandise trade deficit reached a record first-half level despite June's record exports. 

The Iran war's oil shock intensified these underlying dynamics within the Philippines' savings-investment gap development model. As policy increasingly relied on fiscal transfers, credit expansion, and regulatory intervention rather than market adjustment, leverage accumulated, the economy became progressively less adaptive, and policy choices became increasingly constrained. 

This dynamic now extends beyond the fiscal accounts. The Bangko Sentral ng Pilipinas (BSP) faces a narrowing range of monetary options, while new proposals to reduce income taxes and electricity costs promise immediate relief by shifting additional adjustment into the future. 

This installment examines how successive interventions have transformed a temporary inflationary shock into a broader stagflationary process.

II. EO 110 and the Politics of Deferred Adjustment 

Every economic shock requires adjustment. The question is not whether adjustment occurs, but how. 

The same principle applied during the pandemic. Emergency measures that were initially justified as temporary responses to an extraordinary shock gradually became embedded in the economic structure. What began as countercyclical intervention increasingly became a mechanism for sustaining conditions that required continued intervention. 

In an unhampered market, adjustment proceeds through changes in relative prices, profits, losses, production, and consumption. Government intervention can alter that process by redistributing costs across households, firms, taxpayers, borrowers, or future budgets. It can delay or redirect adjustment. It cannot repeal scarcity. 

EO 110 exemplified the continuation of this tradeoff. Like earlier pandemic-era measures, it sought to prevent an immediate economic contraction by absorbing part of the shock through government intervention. The policy reduced visible price pressures and provided temporary relief, but it also extended the process of transferring adjustment away from market signals and toward institutional balance sheets. 

The remainder of this article examines how that transferred adjustment became increasingly visible during the first half of 2026. 

III. 1H 2026’s Record Fiscal Deficit and Record Public Debt Exposes the Cost of Deferred Adjustment 

The first-half fiscal accounts reveal the balance sheet that absorbed a significant portion of the adjustment. 

The National Government recorded a Php 786.8 billion fiscal deficit during the first six months of 2026—the largest January-to-June deficit on record. 

While this represented 47% of the DBCC's full-year deficit target of Php 1.659 trillion, fiscal pressures typically intensify in the second half as government spending accelerates. 

Continued oil-shock subsidies and intervention programs amid strained economic conditions increase the risk of further fiscal deterioration. 

The record first-half deficit was not merely a budgeting outcome. It represented the financing cost of sustaining expenditures that continued to exceed revenues. 

The gap was covered through borrowing. Yet borrowing did not simply finance current expenditures. 

Figure 1 

First-half net public borrowing surged to Php 1.357 trillion, the second-highest level on record, narrowly below the Php 1.371 trillion recorded during the pandemic-driven stimulus driven expansion of 2021. The magnitude was consistent with the record Php 786.8 billion first-half fiscal deficit, reflecting the increasing reliance on debt financing to sustain government expenditures. (Figure 1, topmost pane) 

The first semester borrowing represents 50.67% of the DBCC’s proposed Php 2.68 trillion borrowings in 2026. 

Borrowings in June 2026 jumped Php 519 billion month‑on‑month, the biggest surge since March 2022 at the height of the pandemic. (Figure 1, middle graph) 

The composition of borrowing also highlights growing external exposure. By June, foreign-currency denominated debt accounted for 32.67% of total debt, only slightly below April's 32.78% level—both among the highest since 2020. This occurred alongside record low peso, increasing the sensitivity of public finances to exchange-rate movements. (Figure 1, lowest image) 

Borrowing therefore expanded not only the government's debt stock but also future financing obligations.

Figure 2 

Total debt servicing surged 59.7% in 1H 2026, reaching the second-highest nominal level since 2024. (Figure 2  topmost window) 

Interest payments alone accounted for approximately 15.2% of government spending, the highest share since 2009, while amortization soared 110% as maturing obligations were refinanced. (Figure 2, middle chart) 

Government borrowing increasingly financed not only today's spending but yesterday's deficits. 

Today's deficits become tomorrow's debt service obligations. 

The adjustment postponed in one period reappeared in another. 

This is why the deficit alone understates the fiscal challenge. The larger issue is that debt service expanding claim on future public resources continues to grow. Every peso committed to interest payments and refinancing reduces the government's capacity to respond to future shocks without additional borrowing. 

The consequence extends beyond the Treasury. As financing requirements expand, fiscal policy becomes increasingly dependent on stable credit markets, abundant liquidity, and investor confidence. What began as an oil-shock response has gradually evolved into a broader financing constraint. 

And government financing does not end at the public balance sheet. 

It extends to the nation's balance sheet. 

The alternative is to inflate debt away — whether through the inflation tax or financial repression. 

That story is reflected in the country's record first semester twin deficits. 

IV. The Adjustment Migrates to the Nation's Balance Sheet 

Fiscal deficits tell only half the story. 

The other half appears in the country's external accounts. 

Government can finance expenditures through borrowing. A nation, however, cannot indefinitely sustain domestic absorption above domestic production without relying on external financing to bridge the gap. 

That is exactly what the first half of 2026 reveals. 

June's trade report generated optimism after merchandise exports surged 24.1 %to a record $8.8 billion, while imports increased 19.7 %to $13.07 billion, narrowing the monthly trade deficit to approximately US$4.9 billion. Q2 2026 data showed 24.95% surge in exports while imports jumped 20.44%. (Figure 2, lowest visual) 

Part of this strength coincided with the ongoing global AI ‘arms race’ investment cycle, which has supported demand for semiconductor and electronics exports.

Figure 3

However, the monthly improvement did not alter the broader trend. June's trade position remained comparable to the Russian-Ukraine oil shock of 2022 levels, while the first-half trade deficit reached another record.  (Figure 3) 

The deterioration was reinforced by a record second quarter, with the first-half deficit exceeding even pandemic-era levels. 

This outcome should not be surprising. 

EO 110 softened part of the oil shock. Fiscal policy sustained domestic spending. Monetary policy, including the BSP's ‘soft peg’s regime’, and liquidity support, maintained financial conditions. These measures supported demand, but they barely created additional productive capacity. 

Demand continued to expand while production struggled to keep pace. When the 2026 Iran war intensified oil-market pressures, the adjustment appeared through the import channel, similar to the 2022 oil shock following Russia's invasion of Ukraine. The difference was reflected in the size of the import bill. 

This is why the fiscal deficit and trade deficit should be viewed as interdependent forces. 

One reflects government spending beyond government revenues.

The other reflects national spending beyond national production. 

Both describe the same adjustment process from different balance sheets, requiring funding. 

A country that consistently imports more than it exports must obtain foreign exchange from somewhere else—through remittances, tourism, exports, foreign investments, or borrowing. When those sources fail to keep pace, dependence on external financing inevitably increases. 

The first-half data suggest that this dependence is becoming more pronounced. 

V. Borrowed Stability: June’s BOP and GIR Improvements

Figure 4 

The June improvements in the Balance of Payments (BoP) and Gross International Reserves (GIR) should be viewed in the broader context of the first-half accounts. June registered a US$3.403 billion BoP surplus, while GIR edged up to US$104.74 billion. (Figure 4, upper diagram) 

Although the BOP rebounded sharply over the past two months, the second-quarter merely returned to its long-term trend resistance despite the peso trading at or near record lows against the U.S. dollar. (Figure 4, lower graph) 

Both indicators strengthened during June and were widely presented as evidence of improving external stability. But the improvement deserves closer examination. 

A significant contributor was foreign borrowing by the National Government. In June alone, the government raised US$2.5 billion from the international capital markets and secured an additional US$1 billion through a World Bank syndicated financing package. These inflows increased foreign exchange liquidity and contributed to the rise in international reserves. 

However, these external inflows also carry future obligations. Foreign borrowing strengthens the immediate external position, but it expands debt-service requirements and increases exposure to global interest-rate and exchange-rate conditions. The same borrowing that supports reserves today creates additional claims on future fiscal resources. 

More importantly, external debt creates future dollar obligations. Each additional foreign liability increases the economy's effective “dollar short” position by adding claims on future foreign-exchange earnings. 

That is to say, foreign exchange reaches the economy through fundamentally different channels. It can be earned through productive activity—exports, remittances, tourism, business process outsourcing (BPO), and foreign direct investment (FDI)—or obtained through external borrowing backed by future repayment. 

The Balance of Payments (BoP) records both as foreign exchange inflows without distinguishing their source. International reserves likewise reflect the accumulation of these inflows regardless of whether they originate from current production or future obligations. 

Financial markets, however, eventually distinguish between the quality and sustainability of those flows. 

The first-half accounts suggest that organically generated dollar inflows have become less robust. 

• Foreign direct investment (FDI) has fallen to its lowest level in a decade. 
• At the onset of the Iran war's oil shock, several major tourism destinations—including Boracay, Baguio, Hundred Islands, and Eastern Visayas—reported a plunge in visitor traffic. 
• Remittance growth has slowed to a 4-year low in May 
• BPO industry has signaled weaker expansion targets. 
• At the same time, the recent surge in merchandise exports has been supported by the global AI investment cycle, leaving the trade balance vulnerable should that cycle slow. 

Against this backdrop, external borrowing has assumed a more prominent role in supporting the country's external accounts. 

The first-half data therefore suggest that part of the apparent improvement in external stability reflects increasing reliance of foreign exchange financing rather than a broad strengthening of the economy's underlying capacity to generate dollar earnings. 

Intervention may have altered the transmission of adjustment, but it did not eliminate the adjustment itself. Instead, it increasingly appeared on both the government's and the nation's balance sheets. 

The apparent easing of inflation was financed through deteriorating public and external balance sheets, deferring rather than eliminating inflationary adjustment while deepening stagflationary pressures. 

VI. The BSP's Narrowing Policy Space 

The cumulative effects of this adjustment migration now confront the Bangko Sentral ng Pilipinas (BSP). 

In theory, central banks fight inflation by tightening monetary policy. In practice, that choice becomes increasingly constrained as leverage accumulates across the economy. The first half of 2026 illustrates this dilemma. 

The BSP raised policy rates only twice and has recently signaled ‘small chances’ for aggressive tightening. At the same time, it continued supporting liquidity through historic reserve requirement reductions in 2025, recent regulatory relief measures for banks, including capital relief, and peso support measures. 

The policy pattern was clear: maintaining financial stability had become as important as controlling inflation. 

The reason lies in the changing structure of the economy. 

Higher interest rates may weigh less on households and private borrowers, but they sharply escalate government financing costs, magnify conglomerate refinancing pressures, and constrict credit conditions throughout the banking system. 

As debt accumulates across public and private balance sheets, monetary tightening becomes progressively more costly. 

This creates an unavoidable policy tradeoff. Measures that strengthen inflation control can increase stress across highly leveraged sectors, while measures that protect financial stability can prolong excess liquidity and delay adjustment. 

Since no monetary policy action is neutral, every choice redistributes costs across different parts of the economy.

Figure 5

The BSP's own 2025 Financial Stability Report (FSR) highlights substantial refinancing requirements “wall of maturities” among large Philippine conglomerates over the coming years. These obligations coincide with record government borrowing and expanding sovereign financing requirements. Both depend on the same financial system. (Figure 5, topmost image) 

This helps explain the increasing political priority of financial‑system stability in policy decisions. The regulatory response has provided repeated forms of support to the banking sector, most recently through various forms of regulatory relief including capital relief measures, reserve‑requirement reductions, and expanded deposit‑insurance coverage. 

These actions may strengthen bank balance sheets, but they also raise questions not only about how effectively monetary accommodation is transmitted into productive economic activity but, more importantly, at what cost — and who bears them. 

The credit data provide part of the answer. Despite years of liquidity support and policy accommodation, lending to micro, small, and medium enterprises (MSMEs) remains limited, accounting for less than 5% of total bank lending in Q4 2025. 

As an aside, curiously, the BSP's Q1 2026 presentation subsequently reflected the same figures as the previous quarter, an apparent reporting error that complicates assessment of MSME credit conditions. 

Meanwhile, banks have increasingly accumulated government securities, reinforcing the linkage between sovereign financing needs and the banking system. The share of banks' net claims on the central government (NCoCG) remained near record levels at 20.32% in June, only slightly below the previous peak of 21.06%. In nominal terms, NCoCG remained near record highs at Php 6.236 trillion in June 2026. (Figure 5, middle diagram) 

Relative to money supply, NCoCG accounted for 30.84% of M3 and 31.68% of M2, reflecting a sustained upward trend since 2019. (Figure 5, lowest chart) 

Government securities have therefore become an increasingly important component of bank assets and system liquidity, deepening the interdependence between sovereign financing and financial-system stability. 

This creates the conditions for a sovereign-bank feedback loop: higher government financing requirements increase banks' exposure to sovereign assets, while banks' capacity and willingness to absorb government securities can reduce immediate financing pressures, potentially reinforcing continued fiscal expansion. 

It also intensifies crowding-out pressures, as the government, banks, and large conglomerates increasingly compete for a limited pool of diminishing domestic savings. As public-sector financing needs expand, fewer resources remain available for smaller and more productive private-sector activities. 

The result is a financial system increasingly oriented toward supporting sovereign and incumbent balance sheets rather than broad‑based private‑sector credit expansion, expanding concentration risks. 

This institutional orientation also raises broader questions regarding the revolving-door political dynamic and regulatory capture. 

The BSP Monetary Board are mostly members with extensive backgrounds in banking, large conglomerates, multinational corporations, and multilateral institutions. Such expertise provides valuable financial-system knowledge and institutional experience. However, close interactions and past relationships between regulators, financial institutions, and major corporate sectors can create institutional incentives that favor preserving the stability of existing financial structures — governed by public choice theory, where individual interest, rational ignorance, and rent‑seeking dynamics may shape policy decisions. 

The central concern is whether policy priorities become disproportionately focused on safeguarding incumbent and national balance sheets at the expense of broader credit transmission, productive investment, and ultimately, the economy itself. 

The resulting policy trade-offs will shape the economy's trajectory: whether continued intervention deepens the conditions associated with stagflation, or whether productivity gains ultimately restore greater economic flexibility and resilience. 

VII. The Politics of Deferred Adjustment: Increasing the Annual Income Tax Threshold 

As monetary policy becomes more constrained, political pressure naturally shifts toward fiscal and regulatory solutions. 

The President's proposal in the 2026 State of the Nation Address (SONA) to raise the annual income tax exemption threshold from Php 250,000 to Php 350,000 illustrates this transition. 

After several years of elevated inflation, allowing workers to retain more of their income restores part of their lost purchasing power and may strengthen incentives to work, save, and invest. 

This is a welcome development, but it embodies a fiscal catch‑22 — cushioning inflation’s blow to purchasing power while eroding government revenue at a moment when fiscal space is already dangerously narrow. 

Authorities estimate that the proposal would result in approximately Php 66 billion in foregone revenue. If government spending remains unchanged, the revenue reduction simply widens the financing gap. 

The burden does not disappear; it shifts through other channels—higher taxation elsewhere, additional borrowing, future taxation, expenditure reductions, or inflation.

VIII. The Politics of Deferred Adjustment: Removing System Loss Charges from Electricity Bills 

The same principle applies to another populist SONA proposal: removing system-loss charges from electricity bills. 

Consumers understandably welcome lower electricity costs. However, electricity lost during transmission and distribution remains a real economic cost. Removing the charge from one part of the bill does not eliminate the underlying loss.

Figure/Table 6 

The Philippines is not unusual in the magnitude of physical system losses, which are broadly comparable with several Southeast Asian peers. The difference lies in regulatory treatment. Rather than fully embedding these costs within network tariffs, the ERC has historically allowed a separate recoverable system-loss charge, although the allowable cap for private distribution utilities has been reduced to 5.5% since 2021. 

The actual policy question, therefore, is not whether system losses exist. It is who absorbs the cost and whether the regulatory framework creates incentives to reduce those losses. 

Someone ultimately pays. 

Distribution utilities may absorb part of the burden, but persistent losses could eventually require government intervention, subsidies, or greater public-sector involvement. Taxpayers may bear the cost directly. Regulators may redistribute it through other tariff components. 

The accounting changes.

The economics do not.

This has been the recurring theme throughout this series. 

Again, government intervention can redistribute costs. It cannot abolish them. 

Every intervention changes who pays, when they pay, and where the adjustment appears. 

The deeper issue is the institutional structure created by years of regulatory intervention. EPIRA introduced elements of liberalization, but the electricity sector remained heavily regulated, producing a hybrid system where market mechanisms operate alongside extensive administrative control — selective monopolies. 

This structure has also generated distorted incentives. Under rate-of-return regulatory frameworks, firms may have incentives to expand their regulated capital base because higher approved investments can translate into higher allowed returns. The Averch-Johnson effect illustrates how such arrangements can encourage capital expansion beyond what would occur under a fully competitive market. 

In this environment, system losses can become more than an operational problem. They may also provide justification for additional capital expenditures, infrastructure programs, and regulated cost recovery. The result is that inefficiencies become embedded within the regulatory structure rather than creating sufficient incentives for cost minimization. 

The push to remove system-loss charges may also become part of broader efforts to revise or even overhaul the Electric Power Industry Reform Act (EPIRA). 

Populist ‘free lunch’ relief measures may boost approval ratings and improve electoral prospects—given the Philippine leadership’s recent record low popularity ratings, but scarcity ensures that there is no free lunch. 

Yet, the political economy of intervention lies in the redistribution of costs: benefits are concentrated and immediately visible, while the burdens are often dispersed across taxpayers, future budgets, consumers, and future generations. 

This is the dynamic the great French economist Frédéric Bastiat described in his distinction between what is seen and what is unseen. When political authority redistributes costs while concealing the economic burden from those who ultimately bear it, intervention becomes a mechanism of “legal plunder” — the use of policies to effect invisible redistribution. 

The recurring pattern throughout this series is that intervention changes the location and timing of adjustment. It does not eliminate scarcity. The costs remain embedded in weaker balance sheets, distorted incentives, and reduced economic adaptability. 

IX. Conclusion: The Record Twin Deficits and the Sovereign-Fiscal Doom Loop 

The first half of 2026 demonstrates the consequences of deferred adjustment, now reflected in record twin deficits. 

The stagflationary pressures examined throughout this series did not originate from the oil shock alone. The shock exposed the accumulated consequences of a development model constrained by a persistent savings-investment gap, where years of deepening intervention preserved demand while weakening the economy’s capacity to adjust. 

The twin deficits reveal the same imbalance across different balance sheets. The fiscal deficit reflects government spending beyond available revenues. The trade deficit reflects domestic absorption exceeding productive capacity through persistent import dependence. Both imbalances require continuous financing through borrowing, foreign exchange inflows, and the recycling of existing capital flows. 

At the same time, peso support through the BSP’s soft-peg framework, external financing dependence, and the refinancing requirements of large conglomerates have increased the economy’s reliance on continued liquidity and favorable credit conditions. 

But the deeper consequence is the concentration of financial linkages created by a system increasingly reliant on balance-sheet expansion rather than productive adjustment. 

As banks accumulate greater exposure to government securities, the risks of a sovereign-bank doom loop deepens: fiscal expansion increasingly depends on financial-system support, while financial stability becomes increasingly dependent on sovereign balance-sheet credibility. Large corporate balance sheets remain similarly connected to bank led financing conditions and continued accommodative policy support.  

The result is a growing concentration of financial resources around sovereign and incumbent balance sheets. As these linkages deepen, the financial system becomes increasingly oriented toward sustaining existing obligations rather than expanding broad-based productive investment. 

This is the consequence of weakening the adjustment mechanisms that normally discipline capital allocation. When price signals, losses, and capital reallocation are suppressed, malinvestments persist and accumulate until they appear as financial distress. 

The policy path therefore narrows between two outcomes. Tightening risks exposing accumulated duration and leverage vulnerabilities. Continued accommodation risks extending the intervention loop and deepening the distortions behind stagflation. 

The adjustment was never eliminated. It is being transferred until the system approached its limits. 

The ultimate risk is that the same mechanisms used to postpone adjustment eventually become the channels through which adjustment occurs—through a broader financial and economic crisis.

___ 

References: 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation 

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings 

Stagflation Part 10: The Politics of Contradiction—Rate Hikes, Liquidity Addiction, and External Constraint Under Balance-Sheet Stress 

Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility 

Seed Article 

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

 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

 

The reflexive interaction between the act of lending and collateral values has led me to postulate a pattern in which a period of gradual, slowly accelerating credit expansion is followed by a short period of credit contraction-the classic sequence of boom and bust. The bust is compressed in time because the attempt to liquidate loans causes a sudden implosion of collateral values—George Soros

In this issue: 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

I. The Liturgy of Consequentialism

II. How the PSEi Leadership Changed Hands

III. The PSEi 30s Volte-Face, Engineered

IV. Market Breadth Tells a Different Story

V. PSEi 30-ICTSI’s Liquidity-Gains Drive Volume

VI. July's “UMIC” Rally—and the Missing Confirmation

VII. When Daily Trading Patterns Become the Story

VIII. Concentration and Shrinking Market Participation

IX. Concentration Across the Financial System

X. Benchmark-ism: From Market Benchmark to Political Instrument

XI. Conclusion: The Applause Before the Inflection Point 

The PSEi-ICTSI Show, Part II: When One Stock Becomes the Market

Benchmark-ism, Concentrated Liquidity, and the Erosion of Price Discovery 

In Part I, we mapped how International Container Terminal Services, Inc. (ICTSI) had quietly become the Philippine Stock Exchange Index's (PSEi 30) single point of vulnerability — one company, ranked 16th by assets among the index's 30 constituents, dictating the benchmark's direction while breadth collapsed underneath it. Five weeks on, the show hasn't ended. It's gone to Broadway. 

I. The Liturgy of Consequentialism 

The Philippine Stock Exchange: 

"Port operator International Container Terminal Services, Inc. (ICT) closed at a record market capitalization of Php2.01 trillion on July 14, 2026, becoming the first domestic company to breach the Php2 trillion milestone in Philippine Stock Exchange history..." 

PSE President and CEO Ramon Monzon called the run-up — a doubling of market cap in under ten months — a reflection of "confidence in the leadership of ICT Chairman and President, Mr. Enrique K. Razon, Jr., and in the strategic direction of the company." 

The PSE didn't ask how Php1 trillion became Php 2 trillion in ten months. It didn't ask why one port operator's equity should double while the rest of the index bled or struggled. It simply certified the outcome and read confidence backward into it — consequentialism as institutional reflex: the end justifies, and explains, the means. 

The more fundamental questions—How did prices arrive here? What incentives produced these outcomes? Are these valuations products of decentralized market discovery or increasingly centralized intervention? —remain largely unasked. 

Echoing populist politics, the exchange eulogized the "confidence" embedded in serial bidding activity, as though price were self-authenticating. One has to wonder — if ICTSI reverses, will the PSE eulogize that too, or will the microphone quietly go elsewhere? 

Markets, however, are not merely scoreboards. Their principal economic function is to facilitate price discovery, the continuous process through which dispersed knowledge is aggregated into prices that guide capital allocation. When this process becomes impaired, rising prices cease to communicate genuine information and instead begin transmitting distorted signals throughout the economy. 

The issue is whether one company's extraordinary ascent has gradually transformed the Philippine equity market into something increasingly detached from its traditional role as a mechanism for economic calculation. 

II. How the PSEi Leadership Changed Hands

Figure 1

ICTSI assumed the PSEi's primary-driver role in August 2025, displacing SM Investments Corporation. (Figure 1, topmost window)   

Since the index's February 2026 peak, though, the PSEi 30 rapidly plunged to an interim low of 5,768 on June 1 — and that low did not arrive alone. 

It landed alongside a cluster of events that, viewed individually, might each be dismissed as coincidence, but taken together describe a single phenomenon: 

• Philippine treasury yields spiked to interim peaks across the curve as the peso fell to record lows — a quasi-meltdown in domestic financial markets. (Figure 1, middle graph) 
• EO 110, launched at the outset of the Iran war on March 24, and a cascade of BSP bank-relief measures rolled out from April through June. 
• Money supply (M3) posted a four-month (February–May), double-digit surge. (Figure 1, lowest image) 
• Manufacturing, employment, CPI, and fiscal statistics allbrightened in near-lockstep. 

But when multiple indicators across finance, banking, macroeconomics, and public statistics simultaneously reverse direction immediately following aggressive policy interventions, it becomes increasingly difficult to attribute the entire sequence to chance alone. 

Demonstrated preferences often reveal more than official rhetoric. 

Governments and central banks ultimately reveal their priorities not through speeches but through the policies they implement under pressure. 

III. The PSEi 30s Volte-Face, Engineered 

June delivered the reversal driven overwhelmingly by ICTSI—anchored by a single-day 6.14% PSEi spike on June 15. 

Figure 2

With the prior pace of record gains apparently not enough and with the broader market still insouciant, ICTSI's price advance had to intensify further to reverse the downtrend and foment upside momentum. And so it did. 

The timing mattered. 

ICTSI's acceleration coincided with the period during which policy easing, liquidity expansion, and official stabilization measures were simultaneously gathering force. Whether viewed as coincidence or interaction, the market's reversal cannot be understood by examining ICTSI's price action in isolation from its broader monetary and financial backdrop. 

The PSEi 30 rose 4.65% month-on-month in June, trimming its year-on-year deficit to -5.15% and its year-to-date loss to -0.26%, while lifting quarterly returns to 1.48%. (Figure 2, middle table) 

Financials—led by the top three banks—contributed. But the real engine was the services sector: +13% MoM, +47.4% YoY, +34.03% YTD, and +17.75% QoQ. By month's end, ICTSI alone accounted for 64% of the services index! (Figure 2, lowest chart) 

Figure 3 

At that point, it is not inaccurate to say ICTSI is the services index—the sector classification has become little more than a wrapper around one stock. (Figure 3, topmost visual) 

When a single company accounts for nearly two-thirds of an entire sector's capitalization, movements in that sector cease to reflect the collective judgments of numerous businesses. Instead, they increasingly mirror the behavior of one dominant security. 

Markets derive their informational value from decentralization. The broader the participation, the richer the information embedded within prices. Conversely, as leadership narrows, prices increasingly cease to aggregate dispersed knowledge and instead become reflections of concentrated flows of capital. 

Price discovery is fundamentally a distributed process. Every listed company conveys information about a different segment of the economy—consumer demand, credit conditions, exports, construction, manufacturing, property, investment, and countless firm-specific developments. As market leadership contracts into progressively fewer securities, the amount of independent information incorporated into the benchmark necessarily diminishes, regardless of whether the index itself continues rising. 

The issue, therefore, is not merely index concentration. 

It is the gradual replacement of decentralized market discovery with benchmark construction increasingly dependent upon the fortunes—and bidding activity—of a handful of securities. 

This is central to understanding what has unfolded within the Philippine equity market over the past year. 

If concentration has indeed become the benchmark's defining characteristic, the natural place to verify it is market breadth. 

IV. Market Breadth Tells a Different Story 

Headline indices often conceal more than they reveal. 

The PSEi's impressive 4.65% gain in June appeared to signal a broad-based recovery in Philippine equities. Yet beneath the benchmark's encouraging performance lay a markedly different reality. 

Although sixteen of the PSEi's thirty constituent companies advanced during the month while fourteen declined, the average gain among all thirty members was barely 0.3%—despite ICTSI's extraordinary 18.3 % surge! (Figure 3, middle diagram) 

Market breadth painted an even weaker picture. Total issues favored sellers, 2,049 to 1,738, while decliners outnumbered advancers during fourteen trading sessions compared with only seven advancing days. 

In other words, the benchmark appeared healthy while much of the market continued to struggle. 

The divergence became even more striking when viewed over the first half of 2026. 

Although the PSEi finished the semester nearly unchanged, declining by only 0.26%, the average return among its thirty constituents was a negative 6.8 %. 

More tellingly, twenty-one of the index's thirty companies were in negative territory! (Figure 3, lowest graph) 

Figure 4

2026's advance-decline spread worsened back to 2022 levels, reversing three years of gradual improvement. (Figure 4 topmost window) 

The average share of main-board value commanded by the top 10 brokers held at 63.46% in June and 62.26% for the half — concentration not just in names, but in the hands executing the trades. 

The principal reason for this discrepancy was straightforward. 

ICTSI alone returned 56.97 % during the first semester! 

This is the arithmetic of capitalization-weighted indices. A sufficiently large company need not merely outperform; it can increasingly overwhelm the collective performance of the remaining constituents. Consequently, the benchmark begins communicating something fundamentally different from what the average listed company is experiencing. 

Capitalization weighting is not itself the problem. Such indices are designed to reflect the market value investors collectively assign to listed firms. The concern arises when sustained gains become increasingly dependent upon a narrow set of (one or two) constituents, causing the benchmark to communicate strength that is no longer broadly shared across the market it purports to represent. 

This is not merely a deformation of representation but strikes at the heart of price discovery. 

The purpose of an equity index is to summarize the collective judgments of thousands of market participants regarding the prospects of corporate Philippines. As leadership narrows, however, the benchmark progressively ceases to represent dispersed information and instead becomes an increasingly concentrated expression of capital flowing into a handful of securities. 

The index still moves. But it carries progressively less information about the broader market. 

As informational density declines, benchmark movements become increasingly susceptible to being interpreted as evidence of economic strength when they may instead reflect increasingly concentrated capital allocation—or the cumulative effects of capital misallocation. 

Because policymakers, investors, and the public often treat the index itself as a proxy for underlying economic conditions, they risk understating the market's growing fragility and the distortions developing beneath an apparently “resilient” benchmark 

This is benchmark-ism: political and institutional narrative management aimed at cultivating perceptions of stability by embellishing financial markets and manicuring headline statistics to sustain "animal spirits." 

V. PSEi 30-ICTSI’s Liquidity-Gains Drive Volume 

Price appreciation of this magnitude does not occur in a vacuum. 

Persistent advances require not only willing buyers but a continuous flow of liquidity capable of absorbing selling pressure as valuations rise. Markets require continuous buying pressure to sustain extraordinary valuations. ICTSI's remarkable advance therefore demanded an equally remarkable expansion in trading activity. 

That is precisely what transpired. 

During June, ICTSI's trading volume climbed to an unprecedented Php 37.7 billion, a 41% increase from the previous month. This represented 26.52% of the Philippine Stock Exchange's Main Board Volume (MBV), contributing materially to the exchange's overall 19.6% increase in trading activity. Foreign transactions accounted for only 8.12% of ICTSI's Main Board Volume, suggesting that domestic institutional flows remained the dominant source of turnover. (Figure 4, middle image) 

Liquidity, therefore, became increasingly concentrated around the benchmark's largest constituent. 

Liquidity performs an economic function beyond merely facilitating transactions. It enhances marketability by enabling continuous exchange among market participants, allowing prices to incorporate dispersed information. As trading activity becomes increasingly concentrated in one security, the informational content of prices across the broader market diminishes, weakening the market's ability to guide capital toward its most productive uses. 

Such concentration is economically significant because liquidity itself becomes a scarce resource. Investment capital is finite at any given point in time. Every peso repeatedly committed to sustaining one increasingly dominant security represents capital unavailable for competing firms, alternative sectors, or productive investment elsewhere in the economy. 

Rather than facilitating broader price discovery, liquidity becomes centralized, reinforcing the very concentration that generated the benchmark's impressive performance in the first place. 

Concentration, therefore, is not merely an outcome. It becomes a mechanism capable of perpetuating itself. 

This creates a self-reinforcing dynamic. 

The implicit design/expectation is that sufficiently strong benchmark performance will eventually spill over into the broader market through sectoral ‘rotation,’ allowing the initial concentration of liquidity to evolve into generalized participation—the familiar "rising tide lifts all boats" dynamic. 

VI. July's “UMIC” Rally—and the Missing Confirmation 

Predictably, many observers attributed July's continued advance to the Philippines' attainment of Upper Middle-Income Country (UMIC) status. 

From July 1 to July 17, the PSEi gained 366.94 points, or 6.08 %. ICTSI alone contributed 186.9 points, accounting for more than half (50.94 %) of the benchmark's free-float return! 

The five largest constituents—ICTSI, SM Investments, BDO, BPI, and SM Prime—collectively generated 75.69 % of the index's advance. 

ICTSI's PSEi weight hit a record 27.47 % on July 13 before easing slightly to 26.97 % by week's end (July 17). Meanwhile, the ICTSI-led top five market-cap components reached a historic 56.12 % share of the benchmark! (Figure 4, lowest diagram) 

This isn't retail FOMO (fear of missing out), nor is it a thematic rally riding a global narrative. Unlike South Korea's Samsung and SK Hynix AI-driven melt-up, none of ICTSI's international peers—notably Adani Ports or Shanghai International Port—display anything resembling this price behavior, as previously pointed out. 

The parabola is local, institutional, and largely unaccompanied by comparable moves among global port operators. That makes it considerably more difficult to attribute solely to sectoral fundamentals or international market trends, leaving sustained institutional bidding activity as the more plausible explanation. 

More importantly, the benchmark’s optimism stood isolated, unsupported by the broader signals of domestic financial markets. 

If the UMIC upgrade truly represented a fundamental reassessment of the Philippine economy, one would reasonably expect that optimism to extend beyond equities. A stronger peso and declining government bond yields would normally accompany a broad improvement in investor perceptions. 

Instead, the opposite occurred.

Figure 5

While the PSEi continued advancing, the peso failed to exhibit comparable strength (USD/PHP rose from 61.36 on June 30 to 61.587 on July 17), while Treasury yields largely remained elevated across the belly of the curve, with the principal exception of shorter-term Treasury bills. (Figure 5, upper chart) 

Equity investors focus primarily on expected corporate earnings, foreign exchange markets continuously price the interaction of external and domestic forces—including competitiveness, capital flows, and relative monetary conditions—while government bond markets evaluate sovereign fiscal and monetary risks. 

When these markets tell different stories, the divergence itself becomes valuable information. 

When a purported improvement in national fundamentals is reflected almost exclusively in one segment of one financial market—particularly one increasingly dominated by a handful of securities—the absence of confirmation elsewhere becomes analytically significant rather than incidental. 

Rather than confirming a broad-based improvement in Philippine fundamentals, July's market action suggests that optimism remained concentrated within a relatively narrow segment of the financial system—a product of benchmark-ism. 

The timing adds a further dimension. The UMIC designation arrived ahead of the President's State of the Nation Address (SONA), with approval ratings at record lows. Whether by design or coincidence, a rallying PSEi headline serves the same political function as a favorable labor report or a narrowing fiscal deficit: it contributes to the official narrative of resilience at a moment when that narrative requires the most support. 

The index becomes not merely a financial benchmark but a communications asset — selectively legible as evidence of progress precisely when progress is most politically necessary. 

The question is whether the incentive structure surrounding the index, the SONA, and the approval ratings creates conditions in which such concentration is tolerated, encouraged, or simply left unexamined. 

VII. When Daily Trading Patterns Become the Story 

How was the July run actually achieved? 

The same intraday choreography repeated for two straight weeks: frantic early bidding concentrated on ICTSI, generating momentum that encouraged broader market participation and invited additional buying interest. 

Then came the reversal of what I had previously been described as the "afternoon delight"—the synchronized push into the close. The pattern increasingly appeared to shift toward synchronized distribution, with early buyers potentially realizing gains into the retail and institutional demand created by the day's momentum. This phenomenon was already visible in Part I but became considerably more pronounced throughout July. (Figure 5, lower graph) 

The timing and intensity naturally varied from day to day. 

The pattern across two weeks did not. 

A sequence this consistent, occurring with this degree of concentration in the benchmark's dominant constituent, does not resemble ordinary fragmented market activity. It suggests a level of synchronization that warrants closer examination—what might as well be described as the activity of an undeclared "national team." 

Whether such behavior reflects coordinated positioning, institutional incentives created by benchmark mechanics, or activity requiring regulatory investigation is ultimately a matter for market surveillance. 

Market forensics is the responsibility of regulators, not commentators. 

Yet regulatory scrutiny does not occur in a vacuum. When institutions, policymakers, and market operators have collectively embraced a rising benchmark as evidence of confidence and stability, the incentives for early intervention becomes distorted. 

The same narrative that celebrates market strength also discourages examination of the mechanisms sustaining it. 

This is where moral hazard emerges. When participants observe market outcomes being reinforced or supported by political and institutional actions, risk perception further risks becoming detached from underlying conditions. 

Regulatory attention may arrive only after the cycle reverses, when the costs of previously tolerated distortions become impossible to ignore.

Figure 6

Yet, this past week did show broader participation—21 gainers, 7 decliners, and 2 unchanged—for a 1.87 % week-on-week advance. Yet the average gain was only 1.54 %, still lower than the headline return and still largely explained by market-cap weighting rather than genuine breadth. (Figure 6, upper visual) 

Tellingly, ICTSI's trading volume peaked on July 10 and has since declined, even as Main Board volume rebounded on Friday. (Figure 6, lower graph) 

Read plainly, ICTSI's own engine may be losing momentum even as the index it drives continues climbing on residual momentum. Alternatively, the extraordinary buying pressure sustaining the rally may simply be encountering natural limits. 

VIII. Concentration and Shrinking Market Participation 

The concentration visible in the equity market does not exist in isolation.

Figure 7

The PSE's own 2025 data shows both retail and institutional participation remarkably shrinking, with active institutional accounts declining from 7,622 in 2022 to roughly 4,366 in 2025. (Figure 7, upper chart) 

That’s right. Fewer active accounts controlling a larger share of trading activity is not a paradox; it is the mechanism through which concentration expresses itself. 

The concern is not merely that fewer participants are active. It is that market influence increasingly resides among a narrower group of actors, reducing the diversity of independent judgments incorporated into prices and increasing the surface area for synchronized positioning. 

The decline in participation may itself be a consequence of this process. When outside participants—whether retail investors or independent institutions—repeatedly find themselves disadvantaged by a market increasingly dominated by insider-directed, concentrated flows from the undeclared "national team," participation naturally declines. 

Losses, frustration, and the perception that the game is structurally tilted toward a small circle of powerful participants create withdrawal, leaving the remaining pool of active capital even more concentrated. 

In this sense, declining participation is not merely a separate statistic. It is a ramification of policies and institutional tolerance that permit a market structure where concentration reinforces itself—facilitating the redistribution of trading gains, liquidity, and market influence toward dominant participants while weakening the broader participation necessary for genuine price discovery. 

Concentration, therefore, is not only a condition of the market. 

It becomes a self-reinforcing process. 

IX. Concentration Across the Financial System 

This concentration extends beyond the exchange itself. 

It mirrors developments within the Philippines’ financial system, where total banks led by universal and commercial banks now control a record 83.14% of total financial-system assets, with universal and commercial banks alone accounting for 77.08% as of Q2 2026—a share that has risen steadily since 2008 and accelerated following the pandemic. (Figure 7, lower graph) 

Concentration in the credit system and concentration in the equity benchmark are not separate stories. 

They are the same story expressed through different balance sheets. 

The connection is not merely institutional ownership or market influence. Bank balance sheets are themselves exposed to asset valuations, including equity holdings, securities investments, and collateral values that support lending decisions. When asset prices become increasingly concentrated, the financial system inherits exposure to the stability of those same valuations. 

The allocation of savings, the creation of credit, and the valuation of listed assets are increasingly shaped by a smaller number of institutions. The result is not merely greater efficiency or scale; it is a financial system in which fewer decision points increasingly influence the direction of capital flows and the transmission of financial risk. 

This creates a second-order vulnerability—one that the BSP's latest Financial Stability Report itself acknowledges. 

When collateral values decline, banks may be forced to reassess exposures, increase provisions, reduce lending, or raise capital buffers. The feedback mechanism works in reverse: asset weakness pressures balance sheets, weaker balance sheets restrict credit, and tighter credit conditions accelerate economic stress. 

The BSP's recent capital-relief measures demonstrate the tension facing regulators: while such measures may temporarily ease balance-sheet pressures, their repeated use reveals the diminishing effectiveness of successive interventions. As the effects of previous measures accumulate without resolving underlying mismatches, additional accommodation becomes increasingly necessary merely to maintain existing conditions. Rather than restoring normal adjustment mechanisms, repeated intervention risks deepening balance-sheet dependence on continued support and reinforcing the concentration that created the vulnerability in the first place. 

The political convenience of concentration is therefore accompanied by a growing systemic risk. A financial structure built around fewer and larger institutions may appear stable during expansionary periods, but its vulnerabilities become more pronounced when the assets, collateral values, and market narratives supporting that stability begin to reverse. 

X. Benchmark-ism: From Market Benchmark to Political Instrument 

Here the ICTSI show stops being a market curiosity and becomes a stagflation-series exhibit. Deepening centralization — in banks, in brokers, in the index itself — hands the establishment ammunition to dominate the Overton window through benchmarkism: shaping political narrative via statistics and market signals that appear neutral but are, in fact, constructed. 

The objective isn't merely the survival of the current administration, though that's part of it. It's sustaining a model in which easy money and cheap access to public savings keep the savings-investment gap open long enough for the rent-seeking, build-and-they-will-come model to keep running — a model that benefits the government and entrenched elites first, and the broader public only as runoff, if at all. 

Applied to the PSE, when a benchmark designed to aggregate the collective judgment of investors increasingly reflects the trading behavior of one dominant constituent, valuations lose informational content, economic calculation becomes distorted, and capital allocation becomes vulnerable to misdirection. 

In practice, capital is not formed; it is consumed through investments sustained by distorted signals, artificial liquidity, and expectations of future gains unsupported by productivity. 

Asset bubbles are, at their core, manufactured claims on wealth without the foundation to validate them — a something‑for‑nothing process. 

Capital appears to multiply through rising valuations, but when those valuations fail to correspond with genuine returns, resources committed to sustaining them are evenutally revealed as consumed rather than formed capital. 

And when a bubble is celebrated by the very institution meant to police it, that celebration isn’t confidence — it is the late‑cycle tell, the applause that arrives just before the topping process begins, or signals its inflection point. 

XI. Conclusion: The Applause Before the Inflection Point 

Part I warned that ICTSI had become the PSEi’s single point of vulnerability. Part II shows that the vulnerability has metastasized into a system of concentrated liquidity, shrinking participation, and benchmark-driven narrative management. 

Now, with the Iran war reigniting and the risk of an AI-driven global slump beginning to spill across markets, the external shock may become the catalyst that exposes the imbalances already embedded beneath the PSEi’s rally. 

When an exchange celebrates a bubble instead of interrogating it, the applause is no longer a sign of confidence—it is the late-cycle sound heard just before the market discovers what price discovery was supposed to reveal all along. 

____

Reference: 

PSEi 30: The ICTSI Show June 7, 2026