But the boom
cannot continue indefinitely. There are two alternatives. Either the banks
continue the credit expansion without restriction and thus cause constantly
mounting price increases and an ever-growing orgy of speculation, which, as in
all other cases of unlimited inflation, ends in a “crack-up boom” and in a
collapse of the money and credit system. Or the banks stop before this point is
reached, voluntarily renounce further credit expansion and thus bring about the
crisis. The depression follows in both instances—Ludwig von Mises
In this
issue:
Stagflation Part 18: Philippine Banks as Shock Absorber —
Record Lending, Record Bonds, Record Hiding Places
I. Introduction: Three Shocks, One Balance Sheet
II. The Seen: Record Bank Lending, Bailout Edition
III. The Unseen: Financial Wile E. Coyote Keeps Running
IV. Who Funds the Sovereign? Borrowed Money, Held to
Maturity
V. The Wall: Corporate Maturities Join the Queue
VI. Whac-a-Mole: Every Fix Has a Forwarding Address
VII. The Bank–Sovereign Doom Loop: Who Rescues the
Rescuers?
VIII. Conclusion: When the Coyote Looks Down
Stagflation Part 18: Philippine Banks as Shock Absorber —
Record Lending, Record Bonds, Record Hiding Places
How policy relief, sovereign borrowing, and hidden
balance-sheet losses turn banks into shock absorbers—and shift the cost of each
rescue to the next balance sheet.
I. Introduction: Three Shocks, One Balance Sheet
Every shock since 2020 has had the same first responder:
the banking system. Every bailout has had the same last bearer: the banking
system. In between sits the sovereign, whose paper the banks keep buying.
Underneath runs the same operating framework: free-lunch politics rewards spending now
and sends the bill later. Spending outruns real savings; the gap is
financed through domestic and external credit, central-bank accommodation, and
the printing press. Monetary aggregates duly celebrate. The underlying scarcity
of real resources, meanwhile, receives no such memo.
Following the Keynesian dogma that spending drives GDP,
the political class gets its preferred scorecard: expenditure goes up, and
measured output may follow.
But debt-financed spending is not synonymous with
sustainable production. Borrowing can pull expenditure forward; it cannot,
by itself, manufacture the real savings and complementary capital needed to
sustain production. GDP records the expenditure. The liabilities remain on
the balance sheet.
Emergencies amplify this dynamic.
A banking system
cannot manufacture real savings simply by creating money. It can create
deposits and extend credit, generating claims on future income. Those claims
then accumulate across the economy, and the banks become warehouses for a
growing web of financial promises.
The magnification began with the pandemic rescue:
historic BSP injections of Php
2.3 trillion, an unprecedented combination of interest-rate and
reserve-requirement ratio (RRR) cuts, regulatory relief, fiscal deficits, and a
USD/PHP regime operating under an implicit Php 59 (soft peg) ceiling.
The 2022 oil shock arrived on top of that liquidity.
Now comes the second oil shock of 2026, catalyzed by the
Iran/Middle East conflict, but into an economy carrying a very different set
of vulnerabilities: record public debt, eight months of twin deficits,
weaker GDP growth, a return to 7.2% inflation, sharply lower gross
international reserves (GIR), and a bond market beginning to reprice sovereign
risk.
The rescue
capacity that absorbed the earlier shocks has itself become part of the balance
sheet.
This is the operating environment behind EO 110, BSP
relief, and the current foreign-exchange regime. The Php 61.75 soft ceiling has
given way to a wider operating range of Php 62.465–Php 62.86, before the peso
breached Php 63.
In summary:
- The first rescue
created the liquidity.
- The second shock
tested it.
- The third arrives
after the balance sheets have accumulated the consequences.
The bill now travels through a system whose capacity to
absorb it can no longer be taken for granted. And the banks remain central to that transmission.
Consider EO 110. When a price is held below the level
required to clear a market under prevailing conditions, the gap does not
vanish. Someone must absorb it. The
power producer or transport operator may initially bear the shortfall; bank
credit can finance the resulting cash-flow gap; subsidies or other government
support may shift part of the burden to the sovereign. Depending on the
contractual and institutional arrangements, losses can migrate from one balance
sheet to another.
That is
balance-sheet transfer. Bank credit is one of its shadows in the ledger.
This week's market tape put a price on the accumulated
pressures.
Figure 1
In a follow-up to our latest outlook, Whac-a-Mole
Economics: The Week the Philippine Financial Markets Cracked, the USD/PHP printed its 27th
record low of the year, breaking through 63 to close at 63.06 on October
15, before ending the week slightly lower at 62.985—still a record on a weekly
basis.
The 10-year BVAL yield, after
reaching 8.1115% on October 8, eased to 8.0184% at the week's close. That
reprieve did little to erase the broader repricing: the yield remained above
the May 2026 and November 2022 highs cited in our market comparison. The 20-
and 25-year yields closed at multiyear highs of 8.3856% and 8.3846%,
respectively. (Figure 1, topmost pane)
Equities offered a different surface impression. The PSEi
skidded toward 5,600, hit by ICTSI's 6.89% plunge on October 14. But gains
concentrated in the top 5 heavyweight stocks, led by ICT during the final two
sessions, subsequently lifted the index by 1.43% for the week, recovering
earlier losses.
For a short follow-up to last week's article, see this
week's account of the splenetic Philippine markets in my Substack note, Another Whac-a-Mole Week: Three Markets,
One Signal—Escalating Financial Stress.
Still, the peso, bonds, and PSEi remain under stress.
Three markets, one signal.
They were not
merely reacting to three separate stories. They were repricing claims and
risks across three interconnected
balance-sheet domains: the government's,
the banks', and the conglomerates'.
- The peso prices the external constraint.
- Equities price claims on private businesses.
- Sovereign yields price the terms on which the government
can finance itself—and provide a benchmark that feeds into financing conditions
across the economy.
- The banks sit in the middle, holding claims on the other
two while depending on their own funding conditions, asset valuations, and
borrowers' capacity to pay.
This installment
reads the middle balance sheet. We turn to the August banking data to
examine how the transfer manifests itself in lending, asset allocation, and the
accumulation of financial claims.
II. The Seen: Record Bank Lending, Bailout Edition
The news
headline writes itself: total loan portfolio (TLP) hit a record Php 17.783
trillion in August, up 13.21% year-on-year. Production
loans accelerated for a third consecutive month, reaching 10.57%.
Now look at who borrowed
more. (Figure 1, middle image)
- Electricity, gas,
and steam: +27.03% YoY, accelerating from 24.36% in July. Share of the loan
book: 14.1%.
- Administrative and
support services: +20.91%, up from 15.14% in July.
- Financials:
+9.04%, up from 5.36%.
- Mining:
+54.54%, up from 51.4%.
- Trade:
+10.52%, up from 8.76%.
And those whose borrowing growth slowed:
- Manufacturing:
+6.07%, decelerating from 7.2%—ironically, amid a chip-export boom.
- Real estate:
+4.52%, down from 5.55%.
- Consumer loans:
+16.19%, down from 17.07%. Credit-card growth was 23.34%, slowing for the fifth
consecutive month; auto loans grew 5.83% from 6.97% in July.
The headline is record lending. The more revealing story
is its composition.
The surge is
concentrated in sectors where intervention, regulatory arrangements, or
financing pressures has been shaping capital allocation.
Start with electricity.
The SMC-AEV-MER and Prime Infra-FGEN consolidations, the
suspension of real-property taxes (RPT), the GEA-ALL transition layered on top
of FIT-ALL, and an ERC that returns what it takes in one ruling and recovers it
in the next. For instance, it orders Meralco to refund consumers in one ruling
while approving increases in generation charges in another
These forms part of the institutional landscape we've
examined in previous installments in 2025 (see references below).
The contradiction is hard to miss: regulate prices,
redistribute costs, alter the terms of recovery, and then observe the financing
demands generated by the resulting structure.
The 27.03% lending growth’s mechanism is the Averch-Johnson effect: When allowable
returns are tied to a regulated capital base, firms can have an incentive to
expand that base beyond what an unregulated profit-maximizing firm would
choose.
The bank finances the enlargement. The regulator helps
determine the returns.
Bluntly, the Averch-Johnson effect needs no ideology: the
regulator's formula pays you to borrow.
Now consider financials.
Financial-sector lending accelerated from 5.36% to 9.04%.
Essentially, financials are the BSP
relief regime finding its own counterparty. The system lends to the system,
providing liquidity and bridge financing within the very structure the
interventions are intended to stabilize. Credit circulates; the question is how
much new productive activity it creates and how much of the existing financial
structure it keeps afloat.
Then comes trade.
Trade is where the money illusion becomes relevant.
Retailers see nominal sales growth against Q2 inflation of 6.5%, interpret the
plus signs as stronger demand, and borrow to replenish inventories. But nominal turnover is not real
volume, and rising sales values do not necessarily mean consumers are buying
more goods.
The goods arrive. The inventory has to move.
Yet consumer-credit growth is decelerating. Household
purchasing power is under pressure. If inventories were accumulated on the
assumption that nominal sales growth represented stronger real demand,
retailers could find themselves financing goods that turn over more slowly than
expected.
That is how a credit expansion becomes an inventory
problem, then a cash-flow problem, and eventually a delinquency problem. It
is a causal sequence to test, not an automatic consequence of the lending
figures.
The employment data add another contradiction.
Trade employment
increased by 227,000 in August even as trade lending growth reached 10.52%.
Construction employment rose by 389,500, while construction lending contracted
11.73% year-on-year. (Figure 1, lowest graph)
Employment, credit, and output need not move together in
the short run. But when lending expands rapidly without a corresponding
improvement in real activity—or contracts while employment rises—we need to
look beneath the headline indicators to understand what is financing
production, what is sustaining existing operations, and where adjustment may be
accumulating.
Record lending is not
record value-added.
Our Part 14 already documented the broader disconnect: Q2
GDP growth of 2.3%, first-half growth of 2.6%, a 13.9% contraction in
construction, and a 9.2% decline in gross capital formation. Universal and
commercial (U/KB) bank credit grew 10.3% against an economy expanding at
roughly 2%.
The difference was not productive expansion.
Credit was financing refinancing, liquidity support, and the cost of keeping an
intervention-distorted structure viable.
Credit expanding
while investment contracts is not a boom. It is a financial system
extending claims while the real economy's capacity to generate returns
deteriorates. The lending figures celebrate expansion; the underlying
economic signals reveal its failure to translate into productive growth.
III. The Unseen: Financial Wile E. Coyote Keeps Running
Chased by the Road Runner, Wile E. Coyote runs off a
cliff and hangs in midair. Everything appears fine until he looks down and
realizes there is no ground beneath him.
The gross
NPL ratio is that coyote.
Figure 2
It is a fraction: nonperforming loans over total
loans. While the denominator sprints, the ratio can remain perfectly composed,
even as the numerator climbs. The trick is not that bad loans disappear. It is
that the loan book grows faster than they do.
August's gross NPL ratio held at 3.35%, unchanged from
July. Look beneath the calm.
Gross NPLs reached Php 596 billion, up 8.4% year-on-year
and the second-highest level on record, just below May's Php 601
billion. Meanwhile, the total loan portfolio hit a record Php 17.783 trillion,
expanding 13.21%—all under relief measures. (Figure 2, topmost window)
The denominator is
running faster than the numerator.
Then the other financial coyotes.
- Allowances for credit losses reached a record Php 555
billion, up 6.99% year-on-year and equivalent to 3.12% of loans—roughly 93% of
gross NPLs.
- Distressed assets climbed to Php 1.008 trillion, up
10.66%. (Figure 2, middle diagram)
The reported NPL ratio looks stable because the loan book
is expanding faster than the stock of recognized bad loans. That is the
arithmetic. It is not evidence that underlying credit quality is improving.
The ratio does not tell us how quickly the system is
accumulating risk. It tells us how much recognized bad debt sits inside an
expanding pool of loans. When the pool grows fast enough, the ratio can
hold steady while the underlying burden rises.
The coyote keeps running. The ground has not returned.
Now go one level down, where the aggregate cannot hide
the pattern.
The consumer is
already slowing
In Q2
2026 consumer lending, loan growth decelerated across every category, while
NPL growth outran loan growth in nearly all of them: (Figure 2, lowest chart)
- Consumer loans:
lending grew 14.42%, against NPL growth of 19.64%.
- Motor vehicle
loans: lending grew 6.2%, while NPLs surged 16.6%. Vehicle sales slid by
about 11.4% in August YTD; risibly, the weather is the alibi.
- Credit-card
receivables: lending grew 25.28%, but NPLs jumped 46.53%—nearly twice as
fast.
- Salary loans:
NPLs grew 24.56%, even after the maturity extension under Circular 1239.
The pattern is straightforward: recognized distress is
growing faster than the underlying credit categories in which it is
accumulating. Credit-card NPLs are expanding at nearly twice the pace of
receivables. Motor-vehicle NPLs are rising while sales contract. Salary-loan
distress continues despite extended repayment periods.
Extending maturities can ease immediate payment
pressure. It can also push the recognition of distress further down the road.
The calendar changes; the obligation does not vanish.
Real estate: the
conspicuous exception
Real-estate NPLs rose by only 2.74%, despite the known
vacancy overhang.
That is the outlier. While consumer-credit
deterioration shows up clearly in the numbers, real-estate distress appears far
more contained. Sustained refinancing, relief-enabled reporting, inaccurate
data and delayed recognition offer possible explanations. The available figures
do not establish which mechanism dominates.
But the contrast is worth watching. A subdued NPL figure
is not the same thing as a healthy underlying asset market, particularly when
vacancies and refinancing needs remain part of the picture.
The sectoral
bailout
Now return to the system-wide ratio.
The aggregate remains stable while consumer-credit
quality deteriorates and lending expands rapidly in electricity, financials,
and administrative and support services. These are precisely the sectors in
which regulatory arrangements, policy relief, and institutional financing needs
shape the demand for credit.
The point being: asset
quality is being held up by the bailout sectors.
The composition of lending matters because rapid
expansion in one part of the loan book can dilute the reported deterioration
elsewhere. Remove the denominator growth contributed by the expanding sectors,
and that cushioning effect weakens—or the rot gets exposed.
The aggregate ratio conceals the divergence:
consumer distress is accelerating, while policy-sensitive sectors continue to
expand the pool of outstanding credit.
This is why record lending and a stable NPL ratio can
coexist with deteriorating underlying economic conditions. The banking system
can continue extending claims even as the capacity of households and businesses
to service those claims comes under pressure.
When the
measurement rules move
And the measurement institutions have been moved.
NPL grace periods under Monetary
Board Resolution 296, intragroup
credit reforms, the release
of previously required capital buffers (BSP
Circular No. 1235, Series of 2026), and mark-to-market
relief (BSP Memorandum No. 2026-027) alter the terms under which financial
stress is recognized, absorbed, or reported.
A reclassified loan is not a repaid loan. It is a loan
given more time before it is called what it is.
A maturity extension can postpone a missed payment. A
reporting accommodation can change when a loan is classified as distressed. A
capital-buffer release can create additional room to absorb losses. A
mark-to-market waiver can defer the recognition of valuation changes.
These measures are not identical, but they share a
consequence: they can buy time between the emergence of financial pressure
and its full recognition in reported indicators.
And time changes
incentives.
When institutions are under pressure to preserve capital,
maintain reported solvency, and avoid recognizing losses, the temptation to
postpone bad news grows. Relief can provide breathing room for a genuine
recovery. It can also prolong the appearance of stability when the underlying
problem remains unresolved.
Charles Kindleberger understood the darker side of
financial distress. In
Manias, Panics, and Crashes, he describes the sauve qui peut mentality—the scramble for individual
survival that takes hold during crashes and panics. As institutions and
individuals attempt to escape mounting losses, swindling, fraud, embezzlement,
and other forms of misconduct can become part of the unraveling.
The connection is
institutional, not merely moral. When losses threaten survival and the
incentives favor preserving appearances, desperation can turn deferred
recognition into deliberate concealment.
First, the numbers are softened. Then the
incentives deteriorate. Eventually, someone has to absorb the loss.
The coyote keeps running because the denominator is still
growing, relief is still buying time, and the accounting has not yet forced the
adjustment into view.
But the balance sheet is accumulating the bill.
A stable ratio is
not a stable system. It may simply be a system that has not yet looked down.
IV. Who Funds the Sovereign? Borrowed Money, Held to
Maturity
The loan book is half the balance sheet. The other half
is paper. Yet another Coyote.
Figure 3
- Net
claims on the central government (NCoCG): Php 6.345 trillion, +16.6%
YoY, a seventh consecutive month of double-digit growth, equivalent to roughly
a fifth of bank assets.
- Debt
securities at amortized cost, formerly held-to-maturity (HTM): Php 4.493
trillion, +11.5%, a record. Growth accelerated from 3.17% in March to 11.5% in
August. (Figure 3, topmost image)
- Available-for-sale
(AFS) securities: growth of 14.19%, with accumulated losses of Php 145.65
billion, the third-highest on record.
AFS shows the losses recognized in the books. HTM is an
accounting choice: hold the bond to maturity, and market-price fluctuations
generally do not flow through its carrying value. The price still exists; it
simply does not appear in the accounts in the same way. Add a mark-to-market
waiver, and more of the sovereign's repricing stays outside reported
valuations.
When a bank's loan portfolio grows 13% while deposits
rise 9.44%, the funding gap has to come from somewhere. It came increasingly
from borrowing:
- Bills and bonds
payable: Php 2.312 trillion, the second-highest level, +51.84%.
- Interbank loans:
Php 484 billion, +20.44%.
- Repos: Php 648
billion, +54.55%, following June's record Php 983 billion. (Figure 3, middle
and lowest charts)
Borrow short, hold
long, hope the rollover keeps rolling.
That is transitional Ponzi finance in the Minskyan sense: a
position increasingly dependent on continued refinancing. Here, the
position is the sovereign's own paper.
Figure 4
The cushion is thinning from the other side. Cash to
deposits fell to 9.24%, tying its all-time low; liquid assets to deposits stood
at 47.64%, trending downward. (Figure 4, upper window)
But what counts as liquid? A substantial share is
government paper that may have to be sold into the same market, during the same
squeeze, as other holders seek liquidity. A liquid asset is one you can sell
without taking a damaging loss—not merely one for which a market exists. PDS
data already show the strain: September trading volume was the lowest of 2026
as yields rose.
The fourth balance
sheet: captive savings
The Commission on Audit recently flagged
Php 40 billion in SSS equity-paper losses. That is what is seen.
Beneath the other three balance sheets sits one whose
contributors cannot simply leave. SSS coverage is compulsory, the state shapes
the institutional framework, and members have no direct say over individual
investment decisions. Contributions
reached Php 373.6 billion in 2025, up 14.8%. (Figure 4, lower SSS table)
About Php 572 billion—46% of its Php 1.254 trillion in
assets—is invested in government paper. Another parallel with the banks: Php 531.8
billion in bonds, more than 80% of non-current financial assets and up 45% in
2025, sits at amortized cost. The books record carrying value, not what those
bonds would fetch in the market today.
When yields rise, bond prices fall. The carrying value
need not follow. Temporary is a
forecast, not an accounting category.
The sovereign is also the borrower, so rising yields
pressure government financing and the market value of SSS's bond holdings
simultaneously: correlation, not diversification.
Foreign money can exit, and the peso reflects part of
that repricing. Captive savings cannot exit as freely; the consequences
emerge through investment returns, fund sustainability, and the capacity to
meet future pension obligations.
The channel into
stagflation runs through the paycheck. The compulsory contribution rate
rose to 15% as September 2026 CPI reached 7.2%, including 9.0% for the bottom
30%.
Take-home pay is squeezed to fund a pool that finances
the sovereign. Pension disbursements rose 12.3% to Php 237.7 billion; retiree
pensions are scheduled to rise 10% annually through 2027, while contribution
rates remain frozen.
In 2025, contributions exceeded benefit payments by Php 68
billion in cash. But that is an ex-post result, not proof of long-term
sustainability. There was no forced selling in 2025.
The trigger is net cash outflow that forces the sale
of cost-carried bonds below carrying value. The investment portfolio
carries market risk; cash flows carry demographic and economic risk. They can
deteriorate together.
The money supply:
credit finds another route
Figure 5
Meanwhile, M3
grew 11.2% in August, its seventh consecutive month of double-digit growth.
Deposit substitutes surged 75.9% YoY and have remained above 50% growth since
March. M1 & M2 growth also accelerated from 7.4% and 9% in July to 8.6% and
9.8% in August. (Figure 5, upper diagram)
The banks are
funding the state partly by issuing their own paper. The sovereign borrows;
banks acquire the claims; financial institutions expand their funding. Credit
expansion feeds the sovereign-financing loop.
This is where the Cantillon effect
enters. New money does not reach everyone simultaneously. The first
recipients—the sovereign and the sectors receiving the initial financing—gain
purchasing power before the resulting price adjustments spread through the
economy. Those further down the chain encounter the adjustment after relative
prices have already moved. It is no
coincidence that the oil-shock CPI surge (third wave of the cycle) has been
accompanied by pandemic-era money-supply growth. September
CPI hit 7.2%—returning to April 2026 high. (Figure 5, lower image)
The sovereign gets its financing. Banks accumulate the
claims. Captive savers supply funds they cannot freely redirect. Households
absorb the pressure through reduced purchasing power and compulsory
contributions.
The same system
that finances the sovereign transmits the cost of financing it.
V. The Wall: Corporate Maturities Join the Queue
The BSP has already identified the next claimant. Its Financial
Stability Report (2025) p.30, warns of a sizeable maturity wall among
large conglomerates: approximately Php 1.6 trillion, or 22.7% of conglomerate
debt, falls due between 2027 and 2029 . US-dollar debt averages 37.6% of
conglomerate debt over the next five years. Refinancing has so far relied on
bonds, bank funding, and internal liquidity. The BSP's prescription: “close
monitoring.”
That warning predates
the second oil shock. Since then, the peso has broken through its previous soft
ceiling, reserves have fallen to a three-year low, and the 10-year BVAL yield
has climbed above 8%. The wall did not move. The ground in front of it did.
The stock market repriced the risk first. On October 15,
the PSEi fell 2.2%, with index heavyweights doing the damage. Equity markets
price conglomerate balance sheets daily; the maturity schedule brings the
reckoning more slowly, then all at once.
Refinancing is not
repayment. It is a fresh claim on loanable funds. Banks can create nominal
credit; they cannot manufacture the real savings, labor, materials, and capital
goods needed to sustain every project that credit finances or it cannot mint
the real savings behind it.
The arithmetic puts the wall in perspective. The BSP's
figures imply roughly Php 7 trillion in conglomerate debt. The Php 1.6 trillion
due over 2027–2029 equals about 9% of today's bank loan book. Spread evenly
across three years, it amounts to approximately Php 533 billion annually—about
a quarter of last year's Php 2.08 trillion increase in bank loans.
And conglomerates are not refinancing in a vacuum.
The sovereign is borrowing, with banks' net claims on
government at Php 6.345 trillion, up 16.6%, as the 10-year BVAL yield exceeds
8%.
Utilities and other policy-supported sectors are
absorbing credit: electricity lending grew 27%, while financial and
administrative lending accelerated.
Banks themselves are increasingly reliant on bills and
bonds payable, interbank loans, and repos.
Now the conglomerates arrive at the refinancing window
with Php 1.6 trillion in maturities due over 2027–2029, 37.6% of their debt in
dollars.
Meanwhile, consumers face slowing loan growth, and MSMEs
are already being squeezed out, as discussed in our Magna Carta installment.
Everyone wants the
same pool of savings and liquidity. Not everyone gets access on equal terms.
Four stagflation channels follow.
1. Crowding out.
Funds are rationed by access, not by productivity. Those with sovereign
standing or a conglomerate crest get financed; others face higher rates or a
rejected application. Credit that rolls over old projects does not build
new capacity. That is how credit can grow 13% while gross capital formation
contracts 9.2%. Rolled-over debt keeps yesterday's projects from liquidating.
That is not capital allocation. It is capital preservation for the
already-allocated.
2. Gearing.
Roll over at 8% what was borrowed at lower coupons, and the interest burden
rises even if the principal does not. Rolling over is not deleveraging;
it is gearing with extra steps. These groups are simultaneously borrowers,
bond issuers and, in many cases, owners of the banks that lend to them. Their
exposures are not independent bets. They are tied to the same policy regime and
financing conditions.
3. Dollars.
With 37.6% of conglomerate debt denominated in dollars, the maturity wall competes
for foreign currency with sovereign external debt service and the oil
import bill. All three draw on a reserve stock that has just fallen by $4.85
billion. A wider peso trading range does not create dollars. It reprices their
scarcity.
4. Money. If
real savings cannot meet the queue, adjustment must come through some
combination of higher rates, asset sales, defaults, project cancellations, or
credit rationing.
But if the political system refuses to accept that
adjustment, monetary accommodation
becomes the escape route. Section IV has already shown the direction: seven
consecutive months of double-digit M3 growth, alongside CPI inflation of 7.2%.
When financing sustains claims without expanding productive capacity, the
economy gets more nominal demand competing for constrained real resources. That
is how the same process can feed both sides of stagflation.
The BSP calls it a wall. Walls are what you hit when you
keep driving. The 2027 maturities begin in a few months. The 2026 data already
show the system's preferred response: relief, rollover, and more of the same
paper.
VI. Whac-a-Mole: Every Fix Has a Forwarding Address
The September–October data are not a new story. They are
the old story at new addresses.
Years of spending
ahead of real savings (or the record savings-investment gap) created the underlying imbalances;
emergency interventions postponed adjustment by drawing down reserves, bank
capital, and fiscal room. The oil shock was the trigger, not the cause. Each
fix suppresses pressure in one place, only for it to surface in the next
least-controlled price.
Figure 6
The pressure surfaces in goods, dollars, and yields
because the underlying constraint is real savings. What Austrian economist Eugen
von Böhm-Bawerk called the subsistence fund or real savings is the stock of goods
and resources that sustains workers and projects until production yields
output. Credit can create competing claims on that fund; it cannot conjure the
real resources themselves. When claims outrun available resources, the
adjustment surfaces in prices: consumer goods, foreign exchange, and the price
of time—interest rates.
In each case, the fix moved the problem; none removed
it. The hammer shrinks with every swing: defending the peso spent reserves,
the peso broke anyway, and the bond market is the next mole. A currency can be
managed. A yield curve can only be managed so far. (Figure/Table 6)
Figure 7
The rate channel
shows the same blockage. The BSP cut its policy rate nine times, by a
cumulative 225 basis points, from August 2024. Average
bank lending rates peaked at 8.234% that month and bottomed at 7.125% in
February 2026—a decline of just 110.9 bps, less than half the policy-rate
reduction. By July, lending rates had climbed back to 7.883%, up 75.8 bps from
the low. (Figure 7, upper graph)
Banks price loans according to their own funding costs
and risk, not simply the BSP's policy corridor. Both are being reshaped by the
imbalances already discussed: wholesale funding costs are rising, with bills
and bonds payable up 51.8% and repos up 54.6% (August 2026); sovereign yields
near 8% raise the opportunity cost of private lending; and deteriorating asset
quality requires provisions against potential losses.
The policy rate is
a nudge. The balance sheet is the answer.
Interest is supposed to coordinate saving and investment.
Here, there are two prices: the BSP's policy rate and the rate banks
actually charge. The first can be cut by decree. The second must contend
with funding costs, credit risk, and the government's demand for financing.
A supply shock makes the contradiction worse. Higher
rates cannot produce more rice or oil. They work through credit conditions
instead, tightening financing for consumers and MSMEs while policy-supported
borrowers continue to absorb credit.
That is the asymmetry: the sectors bearing the shock face
tighter constraints, while the sectors sustained by intervention retain access
to financing.
Whac-a-mole
economics is the diagnosis. The bank is the mallet's table. Each strike lands
on the same surface.
VII. The Bank–Sovereign Doom Loop: Who Rescues the
Rescuers?
Name the loop plainly:
- The sovereign runs deficits larger than revenue—Php
1.054 trillion in eight months—and needs banks to absorb its paper.
- Banks hold that paper, fund it short, and park
much of it at amortized cost. Regulatory relief can obscure market losses
without eliminating them.
- Rising yields, driven by the oil shock, peso
weakness, and global bond repricing, reduce the market value of those holdings.
Accounting rules determine how much of the loss is reported, not whether it
occurred.
- Capital relief and forbearance soften the
immediate consequences, prolonging the system's dependence on sovereign paper.
- The sovereign is a major asset of the banking
system and cannot reprice without transmitting losses back to its creditors.
The BSP is pulled toward the familiar response: suppress, subsidize, transfer,
borrow.
- A weaker peso raises the peso value of external
debt—about Php 90 billion in August alone (Part 17)—widening the next deficit
and returning the process to step one.
The sovereign and
the banks are one balance sheet in two names. The crisis is not simply that
either is weak. It is that each can be rescued only at the risk of weakening
the other.
Who rescues the
rescuer?
The last time developing-world sovereigns and their banks
hit this wall, the Baker and Brady Plans offered successive responses. The Baker Plan
(1985) sought to sustain debtors through structural adjustment, multilateral
support, and fresh commercial-bank lending. It failed to resolve the debt
overhang. The Brady Plan
(1989) shifted toward debt reduction, exchanging commercial bank loans for
bonds, some backed by US Treasury collateral, with IMF and World Bank support.
The mechanism changed from extending credit to restructuring claims.
Both approaches depended on coordinated creditors and
access to external financing.
This time the donors have their own queue: record public
debt in the advanced economies, Fed hike bets after hot US inflation, and an AI
financing trade that imploded this week (Nasdaq
−4.5%, the worst week since June; the Semiconductor
(SOX) index −11.4%; more than $1T off the top 20 AI and chip names). South
Korea’s KOSPI plunged 14.5% this week and 18.3% over seven sessions, leaving it
nearly 40% below its June 19 high. Samsung fell 17.7% this week and 43% from
its June high, while SK Hynix dropped 24.3% and 57%, respectively. Japan’s Nikkei bushwhacked, plunging 5.4% (Figure
7, lowest chart)
Bond vigilantes, investors who sell a government's bonds
when they distrust its finances, are already repricing here and abroad.
This matters to the Philippines. The same global
repricing that threatens AI financing also competes with sovereign borrowing
and corporate refinancing for investor capital. A sustained unwind would
tighten credit, weaken collateral, and compete with sovereigns and
conglomerates for a shrinking pool of risk-bearing capital. The Philippines'
refinancing problem is therefore arriving as the capacity of external markets
to absorb risk is itself under pressure.
The central bank faces two broad paths: let
yields, the peso, and asset valuations adjust, forcing losses into the open; or
extend liquidity and relief, postponing recognition while deepening dependence
on continued accommodation. The first is politically painful. The second
feeds the loop.
The system rewards
the second until it breaks.
One reserve stock,
three claimants: the currency, the banks, and the sovereign.
The textbook version is the Mundell–Fleming trilemma or
the Impossible
Trinity: a country cannot simultaneously maintain a managed exchange rate,
free capital flows, and independent monetary policy. Something has to give.
The BSP has sought to manage the peso while domestic monetary conditions lag
behind inflation. The exchange rate has absorbed much of the resulting
pressure.
The structural problem is the deepening fiscal dominance.
When the deficit path remains fixed, the central bank
becomes the residual financier. Tight money today can simply mean more money
creation tomorrow—the unpleasant
monetarist arithmetic of Thomas Sargent and Neil Wallace. Their 1981
analysis explains how persistent fiscal financing needs can ultimately
constrain monetary policy and shift the burden into future monetary
expansion.
That closes the loop. Deficits create the need for financing; banks absorb the sovereign's
paper; repricing threatens bank balance sheets; relief postpones recognition;
and monetary accommodation sustains the financing structure. The cost returns
through the economy then the peso, yields, and prices.
The AI trade adds an external vulnerability: the very
global capital markets expected to absorb more borrowing are reassessing the
returns on one of their largest investment booms.
The sovereign
borrows from the banks, the banks depend on the sovereign, and the central bank
is expected to keep both standing. The rescuers are inside the loop—and the
outside rescuer is busy putting out fires of its own.
VIII. Conclusion: When the Coyote Looks Down
The banking system has become the shock absorber for a political economy that spends beyond
its real savings. Credit expands, sovereign paper accumulates, losses are
deferred, and liquidity is consumed to keep the structure running. Each
intervention transfers the pressure without removing its cause.
This is the
bank–sovereign doom loop: the sovereign depends on banks to finance its
deficits; banks depend on the sovereign's paper to sustain their balance
sheets; and the BSP is expected to keep both afloat. The same rescue that postpones adjustment deepens the system's
dependence on the next rescue.
The tipping
point comes when the chain breaks—when refinancing fails, sovereign
repricing forces losses into bank capital, or pressure on the peso exhausts the
room for intervention. These are not independent risks. Each can trigger the others.
The 2027–2029 corporate maturity wall adds another
claimant to a financing system already stretched between the sovereign,
policy-supported borrowers, and banks' own funding needs.
The Coyote does not fall because he looks down. He falls
when he realizes there is no ground beneath him. Looking down is the
recognition; the fall is the adjustment that can no longer be deferred.
The balance sheets
are still running. The ground beneath them is already giving way.
References:
Stagflation
Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred
Adjustment, October 4, 2026
Stagflation
Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026
USD-PHP
at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal
Bailouts, Bank Stress, December 21,2025
The
Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the
Philippine Peso and the Economy, December 7, 2025
Inside
the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility
Loop, November 23, 2025
